Editor: Please tell our readers about what prompted you to become an environmental lawyer.
Connolly: I became an environmental lawyer initially by chance. When I came to work at Weil, I thoroughly enjoyed the people that ran the environmental practice in the Washington office, and I liked the fact that it was diverse - that I could initially do litigation, transactional and regulatory work. At this time, I have concentrated on transactional and regulatory aspects of our practice.
Editor: On February 17, 2009, President Obama signed into law the American Recovery and Reinvestment Act of 2009, which contained almost $100 billion for clean and alternative energy products. In how many areas has this legislation been implemented to date? What effect has it had on job creation?
Connolly: I think the answers vary depending on the side of the political spectrum a person is on. The government has probably given out $82 billion in contracts, over $100 million in tax benefits and more than a $100 million in certain kinds of entitlements. The money has been allocated among some 25 or so agencies. The Department of Energy has been devoting money for loan guarantees - in fact, initially announcing the award of a loan guarantee on a nuclear generating project. Some funds have been invested in the automobile industry for the development of batteries for electric cars. Some funds have been invested in carbon capture and storage projects, which capture carbon emissions either for a useful purpose or to be stored underground to mitigate the adverse effect.
Editor: What is the current status of the administration's cap and trade system for curtailing greenhouse gases?
Connolly: Currently, no cap and trade system exists. Initially, the Obama administration came into office with a commitment to pass legislation addressing global climate change, but as many know, the U.S. Congress is having a tough time agreeing on almost anything. The first comprehensive piece of legislation on climate change to be passed by either chamber of Congress was passed last year in the House. In the Senate Senators Boxer and Kerry have been trying to move a bill forward, which has not gained traction. Earlier this year Senator Lindsey Graham, a Republican, ventured some ideas on climate change, and has now joined hands with Senators John Kerry and Joe Lieberman to work on a climate change bill that might be able to pass the Senate. Senators Cantwell and Collins have also come up with a cap and dividend proposal that would put more money into green programs and return a bit of money to taxpayers. There are other less ambitious bills being introduced that are climate or energy related. Some bills are looking at renewable energy portfolios, trying to make sure that a certain amount of energy, particularly at utility companies, is coming from renewables. That said, none of the current proposals appear to have the votes to get through the Senate. Early in March, President Obama invited some of the Senate leaders of both parties into the oval office to talk about climate change to see if they could find some common ground. Senator Graham said after that meeting that there were definitely areas of compromise they could reach, but it may be a bill that is not as comprehensive as Senators Kerry and Boxer had wanted earlier.
I personally think that if healthcare legislation does not pass, I do not see climate change getting through Congress this year at all. Lisa Jackson, EPA Administrator, has indicated that she is not going to try for a cap and trade program right now, even under the Clean Air Act authority that she has. The situation changes daily. It will be interesting to see if Senator Lindsey Graham, as the Republican who has expressed a willingness to reach across the aisle, can get some consensus and move the ball forward in small areas. Possibly the Senate will come out with a piece of legislation that is much narrower and much more focused, and we will take baby steps.
Editor: Can you describe how offset projects to generate tradable emission credits could be used to meet an emitter's GHG reduction obligations?
Connolly: An offset credit is another way for an emitter to obtain credits or get some type of authority to allow it to continue to emit pollutants. Under our prototype cap and trade programs, an emitter would be able to buy or be allocated a certain amount of emission credits based on the amount of pollutants he generates. Then if he needs to emit further pollutants, he may be able to pay somebody else to reduce their emissions, which creates an offset.
Editor: Will there be an exchange for trading credits?
Connolly: Eventually this will occur on a larger scale. The important thing to remember about offsets is that you need to have oversight of offsets. In terms of setting up an offset program there are a couple characteristics that one must pay heed to. One is that the reduction that the party undertakes has to be permanent, that it cannot be a momentary reduction in greenhouse gases. It needs to be an additional adjunct to offsetting a pollutant - not some kind of reduction that is going to happen anyway. It will be necessary to send some third party out to evaluate and verify that the credit will result in some type of fundamental reduction in emissions. That is part of the problem because some of these offset programs could wind up being more expensive to confirm and verify than it would be for undertaking them. But at the same time it is something that is worth considering because while it doesn't change the behavior of polluters, it does change the overall amount of greenhouse gases that are being emitted.
Editor: Has there been an increase in the number of climate change bills pending in Congress or SEC proposals since Obama became President?
Connolly: Since Obama became President, we have seen more attention to climate change disclosure but not in the form of shareholder proposals. We have seen requests for shareholder proposals, for clarification or for rule-making. The New York Attorney General put disclosure for public companies on the front page when he undertook a few investigations. The SEC has issued some guidance and has taken the position that climate change has always been required to be disclosed under the SEC reporting requirements. They have provided an interpretive release as to types of disclosure that should be reported in the MD&A analysis, especially in terms of the impact of legislation and regulation on a company's bottom line. Obviously, if you are a reporting company in California, you may have to take into account and disclose matters not required of a company in the Midwest. If your operations are global, then some of the international accords may have some implications on your reporting requirements. If the matters are not material, a company still needs to be able to have thought through their long-range impact. If trends may have a long-term adverse effect on business operations, the physical aspects of climate change need to be taken into account because that is going to hurt your bottom line and that is something that your investors need to know about.
As far as I am aware, none of the bills that are gaining any type of traction call on the SEC to do something.
Editor: Has the EPA been more active under the Obama administration?
Connolly: Overall the EPA has been much more active and engaged - one might characterize it as revitalized. EPA is not merely looking at climate change but moving forward, trying to balance what they want to accomplish, by making sure they back up their action with the science to support it. One of the complaints about the prior administration was that a lot of decisions were made more on the basis of politics and less on science. I would estimate that were you to look at the Federal Register over the past 12 months, you would see that EPA is much more involved in rule-making. We have had some increase in more stringent storm water requirements. We are likely to see more water regulations in the next year. EPA has announced that it is going to increase its enforcement, it is going to provide more oversight to the states, and it wants more financial assurance from a variety of industries that environmentally friendly policies will be followed. While I have not examined how much enforcement has been undertaken, I am confident in saying that what you are seeing is a much more active EPA in thinking about where the rules should be, and the rules are becoming more stringent.
Editor: Are you seeing in drafting documents for clients involved in mergers and acquisitions that there are more stringent standards regarding covenants - the need to forecast any potential future environmental violations, indemnification provisions for present or future emissions or other problems?
Connolly: As a transactional and environmental attorney I am not seeing a lot of specific references in the contract itself, but I am seeing some new terms now being introduced, such as "contaminant" or "pollutant." On the diligence side there is a lot more questioning about the footprint of a business - if you had to make reductions to greenhouse gas emissions, would this require significant changes or are there some ways that you could accommodate requirements without incurring large capital expenditures. The other thing that I do see in contracts is disclosure as to whether a firm holds any emission credits and whether or not they are transferable or could be sold.
Editor: How can your firm help clients with climate change issues and matters?
Connolly: In addition to the obvious, which is how to comply with what clients are currently subject to, we can help them in terms of providing updates as to where legislation or regulations are going, and assist them if they want to participate in the rule-making. We obviously are very good at working with them on the diligence side. Our attorneys can represent carbon emitters and those seeking to develop offset projects in various carbon finance transactions. In fact, our corporate attorneys have advised clients on developing, selling, purchasing and monetizing their carbon in both the EU and voluntary markets. We can draft, review and propose voluntary offset methods, such as drafting and reviewing project documentation for emission reduction projects under the CDM. We can draft and negotiate certified and verified emission reduction purchase agreements. In fact, we can advise on the pros, the cons, the ins-and-outs of buying and selling emission reduction credits on different exchanges and some of the legal issues that are associated with those kinds of credits.
Editor: Is there anything else that you would like to add?
Connolly: We will eventually have some form of carbon reduction requirements. I think that the important part for business and at least for our clients is not to sit back and wait for it to happen. Had they not paid attention to greenhouse gas reporting regulations that went into effect in January, they could really be in dire straits in trying to pull their data together. Management of companies needs to stay on top of things. I don't think that they need to always have the projects in place, but I think that they need to start identifying if and when they have to reduce carbon emissions, what they would do and how they would do it. They need to be proactive, even so far as to lobby Congress or file comments with EPA or suggesting proposed rules, depending on what is good for your particular industry or your particular client.