On The Cutting Edge Of Climate Change Issues

Tuesday, April 1, 2008 - 01:00

Editor: Please tell our readers about Chadbourne & Parke LLP's new Climate Change practice which you and Governor George Pataki now head. Why is it a natural adjunct to Chadbourne's longtime dominance in the area of project finance, insurance and environmental and corporate practices, including M&A?

Cahill: Governor Pataki and my team act under one Climate Change practice umbrella. The firm has outstanding strengths in project finance, mergers and acquisitions, litigation and corporate governance as well as insurance. In all of those practice areas climate change is becoming increasingly important in the way that it is going to affect the interests of our current and future clients. By bringing together top notch lawyers in those various sectors and coordinating our activities in a way that keeps us abreast of the developments of climate change, we can advise our clients of certain risks and opportunities that climate change creates. This expertise gives Chadbourne a unique position in the legal world by bringing Chadbourne's outstanding resources and lawyers with their types of skills to be able to advise our clients on the many legal, political, and policy issues surrounding climate change.

Editor: Governor Pataki's administration is nationally known as the leader in the area of renewable energy and environmental initiatives.

Cahill: In his 12 years as Governor and my 10 years as both Chief of Staff and Commissioner of DEC, Governor Pataki and I put a lot of emphasis on environmental issues, including renewable energy issues and climate change. Governor Pataki was the leader in calling for other states to join him in creating what eventually led to the Regional Greenhouse Gas Initiative ("RGGI"), which is the first of its kind carbon cap and trade program in the United States. Additionally, our policies included a renewable portfolio standard, and the first green building tax credit in the country. We made renewable energy, alternative energy and climate change a central part of our administration - frankly, well before it was an "Inconvenient Truth."

Editor: I gather there are now about 10 states that are a part of RGGI?

Cahill: That is right. The original states in addition to New York were Maine, Vermont, New Hampshire, Connecticut, Delaware and New Jersey. Massachusetts, Maryland and Rhode Island have since joined. Pennsylvania is still involved as an observer, but has not actually adopted the RGGI principles as of yet.

Editor: Would you elaborate on the RGGI principles?

Cahill : RGGI is a cap and trade system that targets the electricity generation and power sectors; it is not economy-wide. The Conference of New England Governors and Eastern Canadian Premiers called for a 10 percent reduction in CO2 below 1990 levels by 2020; New York's Energy Plan calls for a reduction of carbon emission levels of five percent below 1990 by 2010 and ten percent below those levels by 2020 and a stabilization of CO2 emissions thereafter.

Editor: Have other states followed this initiative?

Cahill: There is a Western state initiative and a Mid-Western state initiative, as well as an initiative in Florida where I have been asked to help the technical working group develop its cap and trade program. So there are several initiatives around the country on a regional and state wide basis to fill the vacuum that has been left by the absence of a national program.

Editor: My understanding is that Governor Pataki is also co-chairing the Council on Foreign Relations Independent Task Force on Global Climate Change which is tasked with comparing U.S. climate change policy with that of other nations. What is the overriding purpose of this task force?

Cahill: Governor Pataki is leading a 30-person task force along with Thomas Vilsack, the former governor of Iowa, to examine the economics, science and politics of climate change and to propose a comprehensive strategy to address the challenges and seize the opportunities that climate change creates. The project team will address U.S. climate change policy with an emphasis on its international dimensions. It plans to report its findings this spring.

Editor: The EU's Emission Trading Scheme was a forerunner in advance of any scheme developed by the U.S. on a national scale. How does it work in terms of GHG trading?

Cahill: The Europeans have had considerable difficulty with their trading scheme because they initially granted too many allowances for the program causing the price of the credits to collapse, and effectively minimizing any market pressure to reduce carbon emission that the program was originally designed to produce. RGGI and the other regional and state programs have taken a hard look at the EU program to see what has and has not worked. While the EU trading system is making progress, its policy of granting allowances will not be followed by the cap and trade policies of RGGI and the other programs. Rather than granting allowances, our strategy allows for 100% of the allowances to be auctioned. Actually, New York State is set to start its auction process in June of this year which should help to create a stable price for carbon credits. There is also recognition amongst the various regional cap and trade programs of the need for the eventual interoperability of all these regional trading programs among themselves and also with the EU. Certainly, the broader the program, the more opportunities there are to trade credits which creates greater liquidity in the carbon credit market and greater opportunities for companies and states to manage their carbon reduction commitments. Another piece that is being thoroughly examined by RGGI and the other programs is the mechanism for verifying credits. Everyone has to be confident that the credit is real, and the reductions are real. We have learned from the European experience that the issue of verification has been front and center in the analysis of all these cap and trade programs. The regions and states are taking lessons from Europe into account while keeping in mind that eventually there must be a national cap and trade program.

Editor: Who will administer the auction? Is it a government agency?

Cahill: No, it is not. The states that are members of RGGI have created their own corporate entity which will be conducting the auction.

Editor: Would you compare the current bill proposed by Senators Lieberman and Warner, the American Climate Security Act of 2007, to the EU-ETS regime?

Cahill: The bill proposed by Senators Lieberman and Warner as well as some of the other bills that are pending in Congress are an absolutely critical step in developing a cap and trade program for the United States. Obviously, they focus on mandatory reductions of carbon by means of a mandatory cap and trade system. Both the EU program and the Lieberman-Warner Bill share the principle that mandatory goals must be reached so that there can be a value placed on the credit, which is the critical aspect of any CO2 reduction program. The EU system is not an EU economy-wide cap. It regulates about twelve thousand emission points, accounting for about half of all EU CO2 emissions. Some of the industries covered include the iron, steel, cement, glass, pulp and again electric power industries. What is being looked at by the Lieberman-Warner bill is a broader, economy-wide approach to the cap and trade system. Ideally, steps will be taken to integrate trading between the EU system and a U.S. system that will provide greater liquidity and greater opportunities to identify means for carbon reduction.

Editor: What you are suggesting is that the pricing of those carbon credits will be market-based throughout the world?

Cahill: That is right. A question we have grappled with is what if the cost of carbon rises above a certain amount? Should there be some sort of mechanism to deal with the increase in costs of the credits so that they will not be passed along to consumers? We actually took a hard look at whether there should be a price cap, and it was our sense that the market is the best way to determine the price of carbon without direct interference from the regulators. Markets can find the right price for carbon credits if given the right system which entails appropriate verification and appropriate allocation of allowances.

Editor: What kind of time horizon are we talking about?

Cahill: The RGGI states are moving forward with their auction this June. They will start trading in early 2009. I think on a federal level we have three candidates for president who have all supported various aspects of the cap and trade program, so I am optimistic that there will be a national cap and trade program some time in the next couple of years. Obviously, that is going to require further regulatory action and legislation. We probably are still a few years off from actually having a workable cap and trade system here in the United States, but the foundations are being laid now by the already established state and regional programs. There is an increasing recognition of the need for a process to properly verify the credits so that people can have confidence as to what they are buying and selling is real. Organizations like the Chicago Climate Exchange are taking proactive steps on the issue of verification that will give greater confidence to the people trading as a national program is developed.

Editor: Why does a volunteer system of reducing emissions not work?

Cahill: A voluntary system does not work because you have to have confidence that the credits are valid and the reductions are real. A voluntary system has had a lot of good points - it helps get people involved, it has helped identify opportunities for carbon trading, but, at the end of the day, for people to have any confidence in it, they need to know there is a verification process in place. As the regional and national cap and trade programs to reduce nitrogen oxide and sulphur dioxide emissions demonstrates, a mandatory, market-based reduction program is the quickest and most effective way to bring about real reductions in harmful emissions at the lowest cost to the economy.

Editor: What are the negative effects of having the states and regions create cap and trade systems?

Cahill: In an ideal world you would not want to have a patchwork quilt of different cap and trade programs. This creates uncertainty for businesses around the country, as they struggle to understand different protocols for different states and regions. Companies need and want to see a unified approach to some of these carbon and climate change issues worldwide. Those of us who have been involved in the RGGI program and other regional and state cap and trade programs recognize the inherent weaknesses of having regional programs, yet in the absence of a national program, it is better than having no program at all. Taking action to address climate change is motivating states to go out and do something proactive on the issue, which hopefully will lead to a more seamless national program at some point in the future.

Editor: How can states or groups regulate energy markets when electricity grids extend over many states and EPA has regulatory authority which may conflict with that of the states?

Cahill: What states can regulate are the sources of CO2. There have been ongoing discussions about "leakage," basically meaning that: are you just pushing the CO2 emissions out of the states that have a cap and trade program into surrounding states and regions that do not regulate emissions. Each state does have the ability to regulate the sources of CO2 within its boundaries and many are taking the opportunity to develop cap and trade programs. Now, if states do not participate and opt out of any regulatory program, there is concern that there will be "leakages," further spurring the need for a national program.

Editor: How do you determine that a regulatory scheme is making a positive contribution in terms of emissions reductions?

Cahill: It is not very difficult to quantify when a source is lowering its emissions; we have the experience from the SOx and NOx cap and trade programs. There are also clear benchmarks that have been set, as in RGGI for example. There are also certain ways that regulators can monitor and ensure that those reductions have taken place in the time frame that is set forth under the regulatory process. Much as states have been able to quantify the reductions of NOx and SOx2 that have been called for under the Clean Air Act, I am very confident that through appropriate monitoring protocols we can measure the success of a carbon emission reduction program.

Editor: You are saying on a cost benefit basis the cost of implementing these programs would never outweigh the benefits?

Cahill: That is right, especially if you look at the worst case or even moderate case scenarios of climate change. Looking over the horizon, the effect could have astronomical consequences in terms of lost land, lost crops, and displacement of people and markets. From a policy perspective, the circumstance is unique because this is one of the few times policy makers and politicians are not looking at short term fixes but are rather considering the long term impact of climate change and the costs that could weigh on their constituents.

Editor: How can Chadbourne help its clients in reducing their carbon footprints and maximizing opportunities in the building of green products, and in their fiduciary responsibilities?

Cahill: Obviously, there are plenty of opportunities for clients to take a close look at their own energy use-do an inventory of what they are using now and the technologies that can help to significantly reduce their energy usage. We are trying to identify opportunities for greater efficiency for our clients whether in the industrial sector, the manufacturing sector or services sector by examining best practices in those particular business sectors that can dramatically reduce energy usage through increased efficiency. By our being up to speed on the rapidly changing regulatory framework on climate change we can benefit our clients. There are at least four different regional and state programs in the United States, all with different timeframes, all at different stages of development, that our national clients with businesses in all of these jurisdictions need to be aware of. We can help them understand how these programs could affect them while ensuring that they continue to fulfill their fiduciary and reporting responsibilities with respect to climate change both to their constituents and to government. With that comes the need for transparency, in terms of internal auditing and reporting so as to ensure that shareholders and investors are apprised of the risks and the opportunities that are facing any particular entity with respect to climate change. By bringing our Chadbourne team together we are better able to more fully advise our clients on the risk and opportunities associated with climate change.

Please email the interviewee at jcahill@chadbourne.com with questions about this interview.