This presentation describes the status of the rapidly developing climate change regulation in the United States, particulary the bill proposed by Congressman Waxman on March 31, 2009.

1. ALGIERS AUSTIN DALLAS FORT WORTH HOUSTON MACAÉ MEXICO CITY MONTERREY NEW YORK PARIS RIO DE JANEIRO VITÓRIA
The Rapidly Emerging Climate
Change Regulatory System
The Carbon and Energy Connection
Texas Industrial Energy Management Forum
Houston
April 2, 2009
Scott D. Deatherage
Thompson & Knight LLP
Dallas, Texas
scott.deatherage@tklaw.com
214-969-1206

2. Climate Change Regulation Timeline
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2005
1992 EU
UNFCCC ETS
2007 2009-2010
1997 2003 2006 2008
--Mass v. --US Climate
Kyoto Regional --California Bill US Pres.
EPA Change
Protocol Greenhouse --Western Election
--Lieberman- Legislation
Gas Climate Initiative
Warner 2009 --Post-Kyoto
Initiative
Voted Out US GHG Climate
of Sen. Reporting Change
Comm. Regulation Treaty
--Greenhouse
Gas Reporting
Legislation
--Midwestern
Greenhouse Gas
Reduction Accord

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Developing Federal Regulation

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Current US Federal Legislation
and Climate Change
Massachusetts v. EPA– April 2, 2007, the US Supreme Court
ruled that human emissions of greenhouse gases (GHGs) are
causing climate change and are thereby an “air pollutant”
governed by the federal Clean Air Act. EPA failed to justify not
regulating greenhouse gas emissions from automobiles.
Cases pending on regulation of greenhouse gas emissions from
power plants under the Clean Air Act.
EPA recently sent “endangerment finding” to White House for
review which would open up GHG regulation under CAA.
Major Concern: Clean Air Act structure far from ideal for
regulating GHGs. Need alternative legislation.

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New Federal Greenhouse Gas
Reporting Requirement
Gases that must be measured and reported:
CO2, methane, nitrous oxide and various fluorocarbons
Industries and sources that will be required to report:
Steel, cement, aluminum, landfills, chemical, petroleum,
petrochemical, etc.
Oil and gas industry
Emitters: Offshore oil and gas production, onshore natural gas
processing, natural gas transmission compression, onshore
natural gas storage, LNG storage, and LNG import facilities
Suppliers: Petroleum products, including refiners, importers, and
exporter and natural gas and liquids, including processing plants,
importers, and exporters

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Bailout and Stimulus Bills
Tax and other incentives for wind, solar, geothermal,
biomass, and other renewable energy sources
Tax and other incentives for carbon capture and
storage
Incentives for manufacturing renewable and energy
efficiency property
Incentives for alternative fuels, such as biofuels,
hydrogen, natural gas, and electricity
Amounts are in the tens of billions of dollars

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Waxman-Markey Discussion Draft
Discussion draft for climate legislation released on
Tuesday, March 31, 2009
Not filed as a bill, but released to gain input from
interest groups and other House members

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Beyond Greenhouse Gas Regulation
“Clean Energy”--promotes renewable energy
(including National Renewable Energy Portfolio
Standard), carbon capture and sequestration, low-
carbon transportation fuels, clean electric vehicles,
and a “smart grid” and electricity transmission
“Energy Efficiency”—requires actions to increase
energy efficiency across all sectors of the economy,
including buildings, appliances, transportation, and
industry

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Regulated Greenhouse Gases and Relative
Global Warming Impact
GHG GWP*
carbon dioxide, CO2 1
methane, CH4 25
nitrous oxide, N2O 298
hydrofluorocarbons, HFCs 124 – 14,800
perfluorocarbons, PFCs 7,390 – 12,200
sulphur hexafluoride, SF6 22,800
nitrogen trifluoride, NF3 17,200
* Reflects the global warming capacity of each GHG relative to CO2. Other
gases may be designated by EPA.

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GHG Reduction Goals
By 2012, greenhouse gas reduction of 3% of 2005
levels (2005 levels = 7,206 million)
By 2020, greenhouse gas reduction of 20% of 2005
levels
By 2030, greenhouse gas reduction of 42% of 2005
levels
By 2050, greenhouse gas reduction of 83% of 2005
levels

11. ALGIERS AUSTIN DALLAS FORT WORTH HOUSTON MACAÉ MEXICO CITY MONTERREY NEW YORK PARIS RIO DE JANEIRO VITÓRIA
Covered Entities
Any electricity source of GHG emissions, excluding
emissions resulting from the use of
petroleum-based or coal-based liquid or gaseous fuel,
natural gas liquid,
renewable biomass,
petroleum coke or
hydrofluorocarbons, perfluorocarbons, sulfur
hexafluoride, nitrogen trifluoride, or any other
fluorinated gas that is a GHG purchased for use at that
entity.

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Covered Entities
Fuel Producers and Importers of the following:
petroleum-based or coal-based liquid fuel,
natural gas liquid, or
petroleum coke.
Fluorinated Gas Producers
Geological Sequestration Sites

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Covered Entities
Adipic acid production Silicon carbide production
Primary aluminum Any source that
Ammonia manufacturing Manufactures acrylonitrile,
carbon black, ethylene,
Cement production
ethylene dichloride,
ethylene oxide, or
Lime manufacturing
methanol, and
Nitric acid production
Emits 25,000 tons CO2e per
Petroleum refining year or more
Phosphoric acid production

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Covered Entities
Any stationary source in the Any fossil fuel-fired
following industries: combustion device
individually or that as a group
Ethanol, ferroalloy, food that
processing, glass,
hydrogen, iron and steel, Is all part of the same
lead, pulp and paper, and industrial source of those
zinc, and listed above, and
Emits 25,000 tons CO2e per Emits 25,000 tons CO2e per
year or more year or more
Any local distribution
company that delivers
460,000,000 cubic feet or more
per year of natural gas to non-
covered entities

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Allowance Allocation and Auction
Most details of auction and allocation have been left
up to future discussion
First quarterly auction to be held no later than March
31, 2011
What percentage will be auctioned versus allocated to
sources without charge remains to be negotiated

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Borrowing and Banking
Borrowing—a covered entity can borrow future
allowances and pay pack a greater number as
“interest”
Banking—allowances do not have an expiration date,
so 2012 allowances could be used in 2014 or later

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State Programs
Within a year of passage, the Administrator shall pass
regulations allowing for conversion of allowances
issued by California or RGGI into federal allowances
in an amount “sufficient to compensate for the cost of
obtaining and holding such state allowances.”

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Offsets
Within 30 days of passage, an Offset Integrity
Advisory Board will be established to make
recommendations to the EPA for use in promulgating
offset regulations
Within 2 years of passage, the EPA will promulgate
relevant regulations
A covered entity may satisfy a percentage of its
compliance obligations by submitting 1.25 offsets in
lieu of an allowance

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Offsets
Total offset market may not exceed 2 billion/yr. Split
evenly between domestic and international offsets
The percentage use of offsets per entity =
(2,000,000,000 /(2,000,000,000 + allowances
established for previous year)) x 100
Offset limit--half domestic, half international

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Offsets
To be recommended by the Advisory Board within 90
days of its establishment and established by EPA
within 2 years of passage of law
Start date – draft requires, as a matter of additionality,
practices commencing only after January 1, 2009,
except as provided in 740(a).

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Offsets from Other Programs
An offset credit may be issued for reductions occurring after January 1,
2009,from a project started after January 1, 2001 and offsets have been
issued under a regulatory or voluntary program that the Administrator
determines:
Was established by State or tribal law or regulation prior to January 1, 2009;
Has developed standards, methodologies and protocols through a public
consultation process;
Has published standards, methodologies and protocols that require that
reductions are permanent, additional, verified and enforceable;
Verified by a third party;
Registered in a publicly accessible registry, with individual serial numbers
assigned for each ton of carbon dioxide equivalent reduction; and
Ensures that no credits are issued for activities for which the entity
administering the program has funded, solicited or served as a fund
administrator for the development of, the project that caused the reduction.

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International Offsets
EPA may, under certain conditions, may allow offsets
from a international activities (including CERs) to be
accepted within the U.S. program, but only, among
other things, if
The U.S. is party to an agreement with the host nation;
and
The project or activity is within a developing country.

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State Regulation

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Aspects of RGGI
Baseline Years: 2002-2004
Cap and Reduction Requirements: Stabilize CO2 emissions from power
plants until from 2009 until 2015, then allowances will be retired slowly
as the cap is lowered by 10% by 2020.
Allocation: Allowances may be largely auctioned to utilities, rather than
assigned at no cost; pilot project in 2007, and first auction in 2008. NY,
Mass, and Vermont have decided to auction 100% of allowances.
Safety valve if allowances become too expensive.
Trading and Offsets: Power companies can trade allowances to allow
the most cost effective, efficient reductions. However, offsets are
limited to specific types of projects
capturing landfill gas, eliminating leaks in natural gas distribution
systems and propane systems, reducing methane from farming
operations, and certain forest plantings.

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California and Western States
California AB 32, The California Global Warming Solutions Act of 2006
Baseline: 1990 greenhouse gas emissions
Cap and Reduction Requirements: Reduce emissions to 1990 levels
by 2020
Trading: Allowed under legislation, but must be developed by state
agencies.
Allocation: Not yet determined
Western Regional Climate Change Initiative: Members are Arizona,
British Columbia, California, Manitoba, New Mexico, Oregon, Utah, and
Washington.
Several other states have joined as observers: Alaska, Colorado,
Kansas, Nevada, Ontario, Quebec, Saskatchewan, Sonora, and
Wyoming.

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California Low Carbon
Fuel Standards
US has developing renewable fuel standard that in
essence requires more ethanol use in transportation
fuel for domestic automobiles
California is establishing by the end of 2009 a Low
Carbon Fuel Standard that allows the use of ethanol,
biodiesel, natural gas, hydrogen and other types to
meet carbon emission levels in fuels
Allows tradable credits for low carbon fuel

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Midwestern States
Midwestern Regional Greenhouse Gas Reduction Accord
Nine states in the region, Wisconsin, Minnesota, Illinois, Indiana, Iowa,
Michigan, Kansas, Ohio, and South Dakota, and the Canadian province
of Manitoba.
Calls for
2% reduction in energy use by 2015, with a 2% cut every year after
that;
an increase in the availability of a cleaner ethanol-gasoline mix
known as E85; and
10% of the region's electricity to come from renewable sources by
2015, with an increase to 30% by 2030.
Reductions in greenhouse gases and establishment of a regional
cap-and-trade system.

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How to Survive in a
Carbon-Constrained Economy
1. Understand we are in the midst of a conversion to a carbon-
constrained economy—a change as enormous as the Industrial
Revolution
2. Understand new regulatory paradigm in the twenty-first
century where environmentalists use pension fund investments
and shareholder petitions to pressure corporate action
3. Develop a corporate climate strategy
4. Measure and monitor your carbon footprint
5. Develop a strategy for climate risk disclosure
6. Conduct climate change due diligence
7. Develop a carbon offset strategy and portfolio

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Scott D. Deatherage
Partner
1722 Routh Street
Suite 1500
Dallas, Texas 75201
214-969-1206
Scott.Deatherage@tklaw.com
Blog Sites:
“The New Carbon Cycle”
http://lawandenvironment.typepad.com/newcarboncycle/
and
“Law and the Environment”
http://lawandenvironment.typepad.com/