In the USA, climate change differs from most other topics in environmental law because Congress has yet to establish a comprehensive legal regime to address the issue. As a result, organizations in the USA face an uncertain regulatory environment in which multiple governmental agencies are seeking to address climate change under statutes not enacted for that purpose. Major projects with climate change implications are also receiving considerable attention from Congress, environmental agencies and advocacy groups, and the media. To conduct business in this regulatory environment, organizations need counsel that (1) have experience advising companies on greenhouse gas (GHG) issues under the variety of statutes; (2) can work credibly with a number of government agencies; (3) have relevant litigation experience in the courts and in administrative tribunals; and (4) represent clients before Congress, in dialogue with environmental groups, and in the media.
Climate Change Legislation
In the debate over how to regulate greenhouse gas emissions in the United States, the overarching question has been whether to proceed within the existing framework of the Clean Air Act or to rely upon the U.S. Congress to craft a new legislative solution, possibly in the form of a federal cap-and-trade program to reduce GHG emissions. In 2009, the US House of Representatives narrowly passed climate change legislation that would adopt a cap-and-trade program with sharp GHG emissions reductions over the coming decades (i.e., an 80% reduction by mid-century), but this legislation failed to pass the U.S. Senate. Despite continuing support from the Obama Administration and many in Congress, it is highly unlikely that any comprehensive climate change legislation will be enacted before 2013. In fact, there is an on-going debate in Congress about passing legislation that would prevent the U.S. Environmental Protection Agency (EPA) from taking any steps to regulate GHG emissions under the Clean Air Act or other existing laws. Companies planning future activity in the USA will need to continue monitoring legislative developments in the U.S. Congress and in states where they may want to operate.
Regulation of GHG Emissions Using Existing Legal Authorities
Absent new legislation on climate change, the existing Clean Air Act (CAA) has become the main regulatory vehicle by which GHG emissions are regulated. Notably, however, other statutes are being pressed into service as well, and environmental groups are pursuing creative lawsuits – including citizen suits – to address climate change in the courts.
Clean Air Act Regulation The EPA has issued several GHG-related rules that became effective in 2011. This interrelated suite of rules ushered in the first nationwide regulatory program aimed at controlling GHG emissions in the U.S. First, EPA's “endangerment finding” formally concluded that GHG emissions from cars and trucks threaten public health and welfare by contributing to climate change. This finding triggered an obligation under the CAA for EPA to finalize a regulation intended to reduce GHG emissions from light-duty cars and trucks (essentially by improving their fuel economy). The standards apply to vehicles starting with the 2012 model year.
Under EPA's interpretation of the CAA, once the rule regulating greenhouse gases from vehicles became effective in January 2011, GHGs were deemed “pollutants subject to regulation” under the CAA. This designation triggered a domino effect of regulatory obligations for industrial sources. Included among those newly applicable requirements is an obligation for new or modified large industrial facilities – power plants, cement kilns, chemical manufacturing facilities, and refineries, for example – to go through a lengthy permitting process to ensure that they are using the "best available control technology" (BACT) to reduce their GHG emissions. However, there are no rules or guidance about what BACT might be. Rather, it must be negotiated (or litigated) on a case-by-case basis in every permit. Since GHG emissions have historically been unregulated, and since few control technologies exist for such emissions, there is substantial dispute over what BACT should be, making delay and uncertainty inevitable in the permitting of major industrial projects. While 2011 saw the issuance of the first stationary source permits with GHG limits, those permits are also being challenged in court in light of the uncertainty surrounding BACT for GHG emissions.
EPA attempted to soften the blow to stationary sources with the so-called “tailoring rule” that attempts to limit initial permitting and BACT obligations to facilities that emit more than 75,000 carbon-equivalent tons of GHGs per year. The legality of the tailoring rule is in question since the CAA imposes permitting obligations on facilities with 100 or 250 tons per year (tpy) in emissions of regulated pollutants; the 75,000 tpy limit involves a creative effort by EPA – not obviously supported by the CAA’s language – to limit the GHG permitting regime to the largest individual emissions sources. It remains to be seen whether the tailoring rule will be upheld or struck down in court.
Other Current Regulation
In addition to the CAA, climate change has become an issue subject to challenge or possible regulation under other environmental statutes including the Endangered Species Act (under which major GHG-emitting projects have been challenged for threatening the polar bear or other threatened or endangered species or their habitat) and under the National Environmental Policy Act (which requires environmental impact reviews for major projects involving federal monies or approvals). The White House Council on Environmental Quality proposed guidance in early 2010 applying NEPA review processes to climate issues on proposed projects involving more than 25,000 tpy of CO2-equivalent GHG emissions.
Beyond environmental statutes, climate change has also become an important topic for securities regulators. The SEC recently issued interpretive guidance under which companies offering securities in the US should include disclosures in their public financial reporting concerning the impact on their business of: existing and pending climate legislation and regulation; international GHG accords; actual and potential indirect consequences of regulation or business trends (e.g., reduced demand for carbon-intensive products); and the actual and potential physical effects of climate change.
Regulation of Climate Change by the States
In addition to the federal legislative and regulatory landscape described above, a number of states have adopted their own programs, either to mandate reductions in greenhouse gases or to require the use of greater percentages of renewable energy. Among the leading state laws are California’s AB-32, which requires significant GHG emissions reductions over the next decade; laws enacted by the New England states participating in the Regional Greenhouse Gas Initiative (RGGI) covering power plants; the Western Climate Initiative, which covers most of the western states but is less evolved than RGGI; and renewable portfolio standards adopted by approximately thirty of the fifty American states. Although many of these state and regional programs are being implemented, some states have begun to retreat from such regulation. In some states, legislatures are considering bills that would remove the state from participating in the regional programs. Additionally, a California state court recently stayed the cap-and-trade portion of AB-32.
Litigation Risks Relating to Climate Change
Under US law, a number of large emitters of GHGs face claims by private or public litigants alleging that their GHG emissions involve torts or nuisances that should be redressed by the courts through money damages or injunctive relief. The major federal cases include: Connecticut v AEP, a nuisance claim brought in New York by the attorneys general of a number of states against companies that operate coal-fired power plants; Comer v Murphy Oil, a tort claim brought by private plaintiffs in Mississippi alleging increased severity of hurricanes (including Hurricane Katrina) due to global warming; and Kivalina v ExxonMobil Corp, a tort lawsuit brought in California by Alaskan islanders seeking money damages for, among other things, land lost to rising oceans.
Upon rehearing en banc, the Fifth Circuit reinstated the district court's dismissal of Comer v Murphy Oil, and the Supreme Court denied review, essentially shutting down the Comer case. The Supreme Court heard oral argument in Connecticut v AEP on April 19, 2011, and a decision is expected later this year. The Kivalina case is still in progress in the Ninth Circuit. Given the high stakes involved with climate change, the absence of a comprehensive legislative solution, and the preliminary success of some of climate change lawsuits to date, companies with significant GHG emissions should expect to face ongoing risks of litigation relating to climate change.
Doing Business in an Uncertain Regulatory Environment
Companies looking to do business in the USA must be aware that, although there is considerable public attention to climate change, Congress has yet to establish a legal regime expressly dealing with these issues. Accordingly, it is important for companies – especially major producers or users of energy – to know that the regulatory regime they will be subject to is a “moving target” subject to significant change in the coming years. These companies should carefully evaluate the risks and opportunities associated with different business ventures and structure their operations and transactions accordingly. Having a clear, regularly updated understanding of the status of these issues, having an effective voice with governmental officials, environmental groups and the media, and having a strong advocate in legislative, administrative, and judicial settings will all be essential in this rapidly changing regulatory environment.