California Prepares for the Next Stage of its Greenhouse Gas Emissions Reduction Program

Scoping Plan. The California Air Resources Board ("CARB") will consider updates to its Scoping Plan at the Board's monthly meeting scheduled for May 22 and May 23, 2014. The current Scoping Plan outlines the measures California will take to meet the 2020 emissions reduction target established by Assembly Bill 32 ("AB 32"). The update evaluates the progress California has made in meeting this target and outlines additional measures to reduce greenhouse gas ("GHG") emissions beyond 2020. The Board also will consider the environmental analysis prepared for the update, and staff's written responses to comments on the analysis. The deadline for submitting comments on the environmental analysis and proposed update was April 28, 2014.

Cap-and-Trade Regulations. CARB considered amendments to the state's cap-and-trade program at its meeting on April 24 and April 25, 2014. The amendments are staff's responses to the Board's direction to modify amendments that were proposed on September 4, 2013. The amendments fine-tune the regulations but also make substantive changes on such topics as legacy contracts and disposition of allowances. The Board certified the environmental analysis, adopted Findings and a Statement of Overriding Considerations, approved staff's responses to comments, and adopted amendments to the cap-and-trade regulations. It also directed staff to finalize the Statement of Reasons and to submit the completed rulemaking package to California's Office of Administrative Law. 

Approved Offset Projects. Offset credits can be used to satisfy up to eight percent of a covered source's compliance obligations under the cap-and-trade regulations. One way to generate offset credits is through early action projects, which are projects that have been issued offset credits by an approved early action offset program based upon GHG reductions that occurred between 2005 and 2014. On April 2, CARB released a list of recognized early action offset projects that includes 30 projects under a livestock protocol, 30 projects under an ozone protocol, and 20 projects under a forest protocol. CARB must approve the offset credits issued by an early action offset program before the credits can be used to satisfy cap-and-trade requirements. 

Offset credits can also be generated by offset projects registered with a CARB-approved offset project registry using a compliance offset protocol that has been promulgated by CARB. As with early action offset credits, offset registry credits must be approved by CARB before they can be used to meet cap-and-trade compliance obligations. On April 9, 2014, CARB announced its approval of the first forestry offset project under CARB's forestry offset protocol. The project is operated by the Yurok Tribe and is located in Humboldt County, California.

— Thomas Donnelly (+1.415.875.5880, tmdonnelly@jonesday.com) and Charles Hungerford (+1.415.875.5843, chungerford@jonesday.com)

Legal Challenges to California GHG Regulatory Programs

Legal challenges to California's greenhouse gas ("GHG") regulatory programs continue to work their way through California and federal courts. With the most significant challenge facing possible review by the U.S. Supreme Court, two other challenges pending before the California Court of Appeal, and a fourth prompting CARB to redo part of its rulemaking, the long-term viability of California's latest efforts to curb GHG emissions is uncertain. 

GHG Emissions Allowances and Offset Credits. Under California's cap-and-trade program, covered operators of stationary sources of GHG emissions must surrender compliance instruments—emissions allowances or offset credits—for each ton of GHGs they emit. In Our Children's Earth Foundation v. CARB, No. CGC-12-519554 (S.F. Sup. Ct., March 8, 2013), two environmental groups are seeking a writ of mandate that would stop CARB, at least temporarily, from distributing any offset credits. The petitioners argue that CARB's methods of distributing credits violate the implementing statute by failing to ensure that only new or "additional" emissions reductions qualify for credits. The Superior Court rejected this challenge, holding that CARB acted within its statutory authority to implement the offset credit program. The petitioner's appeal is pending. 

In California Chamber of Commerce v. CARB, No. 34-2012-80001313 (Sac. Sup. Ct., Nov. 12, 2013) (consolidated with Morning Star Packing Company v. CARB), the petitioners challenge CARB's authority to sell GHG emissions allowances at auctions. They also argue that the auctions create a tax that was not authorized by a two-thirds vote in the legislature, as required by the California Constitution. The Superior Court rejected both challenges, holding that CARB acted within its delegated authority to design a system for distributing allowances, and that auction payments are valid regulatory fees that are not subject to the supermajority requirement. In early March 2014, the petitioners filed their appeals with the California Court of Appeal.

Low Carbon Fuel Standard. The Low Carbon Fuel Standard ("LCFS") assigns "carbon intensity scores" to all transportation fuels used in California. A fuel's score is based on the GHG emissions it generates over its entire "lifecycle" on its "pathway" from production to consumption. CARB uses carbon intensity scores to impose compliance costs on fuel producers, which must surrender credits to offset any emissions its fuel generates in excess of the annual emissions cap, as measured by the carbon intensity score. 

In Rocky Mountain Farmers Union v. Goldstene, 730 F.3d 1070 (9th Cir. 2013), the Ninth Circuit held that the LCFS does not facially discriminate against interstate commerce or regulate extraterritorially in violation of the Commerce Clause. The court reasoned that, although the LCFS expressly distinguishes between fuels on the basis of geographical origin, those distinctions are based on real differences in the carbon intensities resulting from transportation and other factors. The LCFS is not an unconstitutional extraterritorial regulation, the court held, because the regulation creates incentives that influence out-of-state activity, not mandates that control out-of-state activity. In March 2014, after the Ninth Circuit denied a petition for rehearing en banc, the challengers filed a petition for certiorari to the U.S. Supreme Court.

In Poet LLC v. CARB, 217 Cal. App. 4th 1214 (App. 5th Dist. 2013), the California Court of Appeal held that CARB committed procedural violations of the California Environmental Quality Act and the California Administrative Procedures Act when it enacted the LCFS. However, the Court of Appeal also allowed CARB to continue enforcing the LCFS while it works to cure the defects. On March 11, 2014, CARB held a public workshop to discuss potential amendments to the LCFS. It will propose a revised regulation in the fall of 2014. (For more on EPA's proposed standard, read our Jones Day Alert, "Update on Litigation Challenging California's Greenhouse Gas Regulatory Programs"). 

— Thomas Donnelly (+1.415.875.5880, tmdonnelly@jonesday.com) and Daniel Corbett (+1.415.875.5843, dlcorbett@jonesday.com)

Anticipated Federal Regulation of Methane Emissions from Oil and Gas Production

Methane emissions from the oil and gas sector will be directly regulated by 2016 under a plan announced by the Obama administration in March 2014. With methane's climate change impact estimated to be more than 20 times greater than carbon dioxide over a 100-year period, the methane strategy is the latest step in the Obama administration's Climate Action Plan to cut greenhouse gas emissions in the range of 17 percent below 2005 levels by 2020. More recently, on April 15, 2014, EPA released five whitepapersregarding potentially significant sources of emissions: compressors; emissions from completions and ongoing production of hydraulically fractured wells; leaks from gas production, processing, transmission, and storage; and pneumatic devices. These papers now undergoing peer review will likely serve as the foundation for EPA regulation as the papers identify contributions from the sources and available controls. 

Despite EPA estimates, the rate and volume of methane emissions from the oil and gas sector are hotly disputed. In September 2013, the University of Texas—in partnership with the Environmental Defense Fund and participating energy companies—found that total methane emissions from natural gas production from all sources were comparable to EPA estimates, but the methane emissions from well completion flowback are 97 percent lower than EPA estimates from April 2013. At the same time, methane emissions from pneumatic equipment and storage leaks were significantly higher than EPA estimates. In contrast, researchers from Stanford and Harvard published a February 2014 article inScience finding that methane is leaking from oil and natural gas drilling sites and pipelines at rates 50 percent higher than EPA estimates.  

The Climate Action Plan recognizes that states are the primary regulators of oil and gas production activities and the distribution of natural gas. Colorado is the first state to directly target methane emissions. As such, Colorado's new regulations that directly target methane emissions from oil and gas operations may become a model for federal regulation, especially given that they were developed by industry and environmentalists. Colorado intends for its rules to complement the new source performance standards, but they also apply along the entire production chain. This includes monitoring and reporting for the well site, storage tanks, gathering lines, compression stations, and processing plants, as well as descriptions of the required pollution equipment and control practices. The rules are expected to reduce methane emissions in the state by approximately 65,000 tons per year.

Public comments on the five white papers regarding methane and VOC emissions from the oil and natural gas sector can be submitted to oilandgas.whitepapers@epa.gov until June 16, 2014.