Interesting Times: The Obama Administration and Climate Change

Note: This Update reflects the opinions of its author(s) and does not necessarily represent the views of Perkins Coie.

The content of this Update was also published as an article in the December 2008 edition of the Oregon Insider.

"Never make predictions, especially about the future." Casey Stengel

As the 111th Congress and 44th President take office, we do not expect controversy to continue about whether humans contribute to climate change with increased emissions of greenhouse gases (GHGs). Industrial nations in the Kyoto Protocol have had significant GHG reporting and reduction requirements in place since 2006.

North American states and regional organizations such as the Western Climate Initiative (WCI), the Midwest Greenhouse Accord (the Accord) and the Northeastern Regional Greenhouse Gas Initiative (RGGI) already have reporting and cap-and-trade programs in place or scheduled to start between 2009 and 2012. The new administration and many in Congress agree that global warming demands prompt and wide-ranging attention. In addition to GHG reporting and regulation, the physical effects of climate change will impose new costs not previously considered by industry, commerce or consumers. How the new administration and Congress will address the problem remains to be seen.

What Is at Stake?

Comprehensive federal climate change regulation, as promised by the new administration and Congress, has positive and negative implications. Its most desirable effect would be uniform and consistent regulation among the various states. Federal legislation would avoid a "patchwork" of inconsistent and contradictory regulation among the states and regions. That patchwork inevitably would advantage some and disadvantage others. Nationwide regulation would have to reflect the political reality that the Midwestern and Southeastern states have made little progress to date on the issue and will likely resist strict and immediate controls.

Although many industrial and commercial spokesmen argue for federal rather than regional regulation, such action might present special risks to Oregon and the Northwest. It might be politically unrealistic and impractically difficult to achieve federal legislation that recognizes the GHG reductions, improved energy efficiency, low carbon energy production and renewable energy progress that Oregon and Washington already have achieved. Many of our efforts have "picked the low-hanging, least costly fruit" that several other states have yet to capture. Future GHG reductions will be more costly to the Northwest than to other regions. One-size-fits-all federal legislation might disadvantage our region.

In addition, potential revenue from auctioned carbon allowances (variously estimated between $50 billion and $300 billion annually, based on the price of carbon assumed)[1] is a tempting source of funds that Congress may put to other purposes and not reinvest in industry to assist with compliance. State legislatures might be more attentive to economic impacts on local commerce, industry and jobs and might be more careful to use auction revenues to moderate the cost of new investment and new efforts to reduce GHG emissions.

The Economy Is the Threshold Issue

As this article was written, the Dow Jones Industrial Average was below 8,000, the prime rate was 4 percent and both were declining. National unemployment was 6.5 percent and increasing.[2] President Bush and the 110th Congress had already committed more than $700 billion to stanch the hemorrhaging U.S. economy, without evident success.[3] President‑elect Obama made ambitious campaign promises to promptly develop a federal GHG reporting and cap-and-trade program; direct the Environmental Protection Administration (EPA) to regulate carbon dioxide as a pollutant under the Clean Air Act; and grant California a waiver for its strict CO₂ motor vehicle emissions standards. Nevertheless, the main issue for the last two months of the campaign and the interregnum has been the economy.

Congressional leaders, business, social and economic organizations agree that the economy is the new administration's priority, and an economic stimulus package must come first. Regardless of whether this funding reduces capital gains taxes, increases marginal tax rates, props up failing industries or invests billions of dollars in a new "green" economy, the legislation will be controversial, and it will likely occupy the administration longer than the first 100-day "honeymoon." While the economic crisis persists, it seems unlikely the new Congress would have the time or interest to compromise on long-term, economy-wide GHG cap-and-trade legislation. According to Sen.r Jeff Bingham (D-NM), climate change legislation will likely take more than a year to enact. In the interim, Congress is more likely to pursue a piecemeal approach, enacting legislation to boost energy savings in building and transportation and requiring utilities to produce more electricity from renewable sources.[4]

Numerous trade associations and industry groups are concerned that major new costs for carbon emissions would only worsen the recession. United States recessions typically last 18 to 24 months before recovery starts. In this regard, the recent climate change proposals from the Obama campaign,[5] Rep. Dingell and Boucher,[6] and Sen. Lieberman and Warner[7] do not implement carbon cap-and-trade programs until 2012 or later. President‑elect Obama's economic stimulus package is likely to contain significant funding proposals for new clean energy jobs, technologies and infrastructure, including automobiles, carbon sequestration R&D and renewable energy.[8] If enacted, this funding would be expected to significantly reduce GHG emissions in the long-term future and might thereby reduce the demand for immediate GHG reporting and mandatory reductions.

If economic pressures impede federal climate change regulation, pending regional programs still would go forward. Thus we think the emerging regional cap-and-trade programs are likely to be complete in their design and at least partially implemented by the time federal legislation makes significant progress. However, the regional programs also will face opposition, including potential challenges as to whether they are constitutional under the supremacy clause. We discuss the specific reduction goals of various GHG emission programs later in this article. We think President‑elect Obama will propose some GHG emissions reduction goals in the near future before seeking comprehensive cap-and-trade legislation.

What Obama Can Do Quickly

During the first 100 days, President Obama will be preoccupied with addressing economic issues, assembling a new cabinet and dealing with the Senate confirmation process.[9] Concurrently, there are a number of regulatory actions the president can take promptly to affect climate change.

Many of these actions will involve the EPA. It will have a major role in implementing many of the president's climate change initiatives. After naming critical cabinet appointees (e.g., Treasury), it is likely President Obama will choose the next EPA administrator. The list of candidates is long, but whomever is chosen will share President Obama's views on the pressing need to reduce GHG emissions. During the confirmation process, the Senate undoubtedly will examine how quickly and rigorously the nominee intends to address these issues, and therefore these confirmation discussions will be a strong indicator of near-term federal climate change activities.

Carol Browner, former EPA administrator and one of President-elect Obama's close transition advisers, has publicly recommended that the EPA do the following immediately:

• Announce its intention to "fully exercise" its Clean Air Act authority to regulate GHGs and issue a so-called "endangerment finding" detailing the risks posed by climate change;
• Measure the lifecycle GHG impacts of the renewable fuel standard;
• Reassert its authority to regulate power plant emissions under the New Source Review program;
• Push utilities to take steps to encourage energy efficiency, including encouraging "decoupling" utility earnings from volume of sales;
• Promote advanced vehicle technologies developed by the National Vehicle and Fuel Emissions Laboratory to aid compliance with vehicle fuel-economy standards;
• Establish performance standards for biofuels production to ensure that the increase in biofuels production does not lead to unacceptable environmental consequences; and
• Plan with the Army Corps of Engineers for the impact of climate change on water resources. [10]

We can expect the EPA to be most active in these areas from the moment the new administration takes office.

It is also likely that President Obama will issue executive orders to reverse standing Bush administration policies on certain climate change and energy issues and any last-minute "midnight regulations" the old administration might issue as it leaves office. For example, during his campaign Obama said he would approve California's request for permission to implement GHG restrictions on automobiles that are more strict than those mandated by the Energy Independence and Security Act of 2007.[11] The latter would be significant because 17 other states, representing in total 45 percent of the nation's automobile market, already have regulations that would automatically apply California's proposed standard to automobiles sold in their respective states.[12]

Internationally, the president‑elect has promised to engage with the global community on climate change issues. This means the United States will actively participate in negotiations to further implement the United Nations Framework Convention on Climate Change ("UNFCCC")[13] and to comply with international commitments that will replace the Kyoto Protocol when it expires in 2012. Although invited, we doubt the president‑elect will formally attend the December 2008 United Nations Climate Change Conference in Poznan, Poland, but he will likely send representatives. We do expect the administration to be fully engaged in discussions and negotiations to develop a post-Kyoto international program as the UNFCCC moves toward its next conference in Copenhagen in November 2009.

Outlook for Federal Cap-and-Trade Legislation

Federal reduction of GHG emissions by cap and trade, carbon tax or other mechanism will require congressional, and perhaps judicial, approval. The president‑elect, the House of Representatives and the Senate all have developed different proposals, and it is too early to speculate how negotiations will play out in the next 18 months. We think that to succeed, the Democratic majority in Congress and the president must work closely with Republicans to find common ground on various "hot button" issues, including preemption of state and regional programs, allowance allocation and pace of emissions reductions. The leading proposals are detailed below.

President‑elect Obama wants an economy-wide market-based and 100 percent auction cap-and-trade program to reduce GHG emissions to 80 percent below 1990 levels by 2050.[14] Auction revenues would be used to advance GHG emission reduction, fund green jobs and insulate consumers from emissions reduction-caused rate shocks.[15] The campaign literature was ambitious. We have seen little development on this issue since the election.

Congressman Ed Markey (D-MA) introduced legislation in June 2008 that would cut emissions 85 percent by the year 2050 and auction 100 percent of allowances. H.R. 6186, the Investing in Climate Action and Protection Act ("iCAP"),[16] was touted as the first "cap-and-invest" system, but no further action has been taken and the bill will likely die with the expected dissolution of Chairman Markey's Select Committee on Energy Independence and Global Warming.[17]

John Dingell (D-MI), Chairman of the House Energy and Commerce Committee, has said a climate change bill is one of the top priorities for his committee. His recent "discussion draft," co-sponsored by Rep. Rick Boucher (D-VA), would preempt all state cap-and-trade programs with a goal of reducing emissions by 6 percent below 2005 levels by 2020, 44 percent below 2005 levels by 2030, and 80 percent below 2005 levels by 2050.[18] Although it does not mandate any one method to distribute allowances, it proposes to use some of the revenue to fund efforts to reduce emissions. The Dingell-Boucher bill would impose carbon restraints less stringent than the pending regional programs and is more lenient than President‑elect Obama's cap-and-trade plan. However, Rep. Henry Waxman (D. CA) has recently challenged Rep. Dingell for his committee chairmanship, and many believe that Waxman is more likely to pursue legislation consistent with that favored by the new administration.[19]

In the Senate, the Lieberman-Warner Climate Security Act (S. 2191) was the first climate change bill to be successfully voted out of committee, but it was defeated by a procedural vote on the Senate floor in June 2008. The bill would have covered electric power, transportation, manufacturing and natural gas sources that together account for 87 percent of U.S. GHG emissions. It would have capped those sources at 4 percent below 2005 emissions levels by 2012 and lowered them to 19 percent below 2005 levels by 2020, with the goal of reaching 71 percent below 2005 levels by 2050. Although the bill will certainly die at the end of this year, it is likely that portions will be reintroduced in the 111^th Congress, perhaps sponsored by Sen. John McCain (R-AZ), who is expected to continue to lead in developing bipartisan, comprehensive climate change legislation in the next term. However, no new Senate legislative proposals have been published to date.

Meanwhile, Back in the States . . .

The three regional state programs, WCI, the Accord and RGGI, are continuing to develop and will take effect in the next two to three years. WCI, whose members represent seven states and four Canadian provinces, has mandated multisector reporting by 2010. It will implement cap and trade by 2012, with a plan to reduce emissions by 15 percent below 2005 levels by 2020.[20] The Accord, which includes six Midwestern states and one Canadian province, plans to reduce GHG emissions by 15 to 25 percent below 2005 levels by 2020.[21] RGGI, which includes 10 Northeastern states, began auctioning carbon allowances this fall, and cap and trade for electric utilities will begin in 2009. RGGI plans to reduce GHG emissions from power plants in participating states by 10 percent below 2009 levels by 2019.[22] Therefore, even if federal action is delayed or blocked, these regional programs will continue to go forward. They require careful observation.

Conclusion

The content of this update was originally included in the December 2008 issue of Oregon Insider.