Monday, November 14, 2016

Dispatches from COP22: Envisioning International Climate Policy in the Trump Era

By Melissa Powers, GEI Director and Jeffrey Bain Faculty Scholar & Professor of Law, Lewis & Clark Law School

The former head of the U.S. climate change delegation, Jonathan Pershing, held a brief press conference on Monday to discuss the future of U.S. climate policy. Although Dr. Pershing noted at the outset that he could not predict where U.S. international climate policy will go, because Donald Trump has not yet appointed a transition team to navigate the U.S. position regarding the global climate treaty, most of the questions from the press focused on the potential impacts of a Trump Administration. The press asked about U.S. follow-through with its funding commitments, the potential U.S. withdrawal from the Paris Agreement or even the United Nations Framework Convention on Climate Change (the treaty signed by George H.W. Bush and ratified by the U.S. Senate), potential retaliatory responses from the European Union through a border carbon tax if the United States does rescind its climate commitments, and the degree to which any U.S. withdrawal would affect other countries’ compliance. On the positive side, it seems clear that other countries are committed to following through with their own climate mitigation strategies. However, the questions also revealed the extent to which the United States would lose standing on a number of other global issues if it retreats from the climate treaty.

The Paris Agreement is arguably one of the most significant climate achievements of the Obama Administration. Before President Obama took office, the United States had developed a decidedly poor reputation due to the George W. Bush Administration’s repudiation of the Kyoto Protocol and continued resistance to binding climate mitigation commitments. When President Obama took office in 2009, hopes rose that the U.S. negotiating position would change significantly. However, many countries loudly opposed President Obama’s support for and behind-the-scenes negotiations of the Copenhagen Accord, a generally weak document that uses a bottom-up approach for securing countries’ climate commitments. While President Obama walked away from Copenhagen having broken a major logjam in the climate treaty-making process, his focus on negotiating the Accord with only a handful of major emitting countries left many developing countries feeling alienated and betrayed.

Since then, however, the Obama Administration’s persistent efforts to address climate change domestically (through, for example, regulation of greenhouse gas emissions from motor vehicles; support for renewable energy research, development, and deployment; and carbon dioxide emissions limitations from power plants) have strengthened the United States’ standing on the international climate stage. Most significantly, the Obama Administration’s bilateral negotiations with China led to a joint agreement for both countries to reduce greenhouse gases and increase renewable energy development. This agreement paved the way for the Paris Agreement—the first international climate treaty in which nearly all countries of the world have agreed to take action to address climate change.

It is hard to overstate how much the Obama Administration’s efforts have paid off in terms of good will for the United States. It is also hard to overstate how damaging another U.S. retreat from the international climate regime will be—not only to the world at large, but to the United States itself. Good faith participation in the global climate treaty-making process has allowed the United States to exert its influence on many countries in a positive and collaborative way. U.S. funding and support for technology innovations and developing country access to clean energy have allowed the United States to develop and maintain effective working relationships around the world. U.S clean energy companies have also benefitted from access to new markets as more countries increase their own use of renewable energy. If the United States retreats from the climate regime, other countries will step in to fill the gap. These countries will not only provide their own industries ready access to emerging clean energy markets; they will displace the United States as one of the more influential parties in the climate regime. In fact, China’s delegates have specifically said that the U.S. retreat will give China the moral high ground as it moves to occupy the space left vacant by the U.S.

A friend of mine commented the other day that the election of Trump will erode the United States’ status as one of the world’s superpowers, particularly if the Trump Administration follows through with its threats to withdraw from the Paris Agreement and the larger climate treaty regime. Perhaps that’s hyperbole. But at the end of the press conference, the man sitting next to me revealed how happy he is with Donald Trump’s election. “I’m Russian,” he said.

Tuesday, November 8, 2016

Does Regulating for Cleaner Air Push Industry towards Favoring a Carbon Tax?

By Joni Sliger, Energy Fellow
Carbon tax supporters collected signatures to get Measure 732 on the ballot.
Credit: Washington Secretary of State Blog

Tonight, Washington could become the first state in the nation to enact a carbon tax. Ballot Measure 732 proposes an escalating tax on carbon emissions, with complementary tax reductions for what is meant to be a revenue-neutral measure (though there is some debate on that front). While there are still too many undecided voters to call it, Ballotpedia reports that four polls on the measure show support for the tax slightly edging out the opposition but still within the margin of error (averaging 41.75% to 37.45% with a +/- 4.45% margin of error). Notably, that support does not include many of the state’s environmental groups, whom the Seattle Times reports are working on an alternative proposal. So how is a carbon tax on the verge of passing despite industry opposition and a divided environmental community?

A carbon tax or “carbon pollution tax” imposes a tax on fuels in proportion to the amount of greenhouse gas emissions they emit. Suppliers of gasoline or coal thus would pay the state for the expected emissions of the product they sell. Consumers may expect suppliers to raise prices accordingly. In Washington, Measure 732 proposes to cut other taxes, such as the state sales tax and the business and occupation tax, and to protect low-income families by raising the Working Families Tax Credit. On the balance, these changes aim to be revenue-neutral, meaning the state would neither lose nor gain money with the Measure versus the current tax structure. The overwhelming majority of economists have repeatedly supported a carbon tax as the most economically efficient way to take action against climate change.

Proponents of the measure—led by the Washington State Chapter of the National Audubon Society—have outraised and outspent industry opponents: proponents raised almost $2.8 million and spent about $2.5 million while opponents raised less than $1.5 million and spent less than $800,000. Why are industry opponents—including such deep-pocketed players as the American Fuel & Petrochemical Manufacturers and the Koch Brothers—not fighting harder against Washington’s carbon tax measure?

Perhaps industries facing sector-specific climate change regulations would prefer a carbon tax.

Washington just finalized its Clean Air Rule (Rule), as my fellow Energy Fellow, Ed Jewell, blogged last month. This new regulation is more stringent than the federal Clean Power Plan (CPP). The Rule went into effect in mid-October, requiring the state’s 24 largest emitters to reduce greenhouse gas emissions by 25% below 1990 levels by 2035 or pay compliance credits for reductions. Over time, the qualifying cap defining who is regulated by the Rule will decrease, effectively covering more and more emitters. The Washington Department of Ecology has compiled a list of the 68 entities potentially subject to the Rule. The state’s economic analysis estimates that entities may pay as little as $410 million or as much as $6.9 billion over 20 years to comply, depending on how they decide to comply. Again, these costs will fall primarily on only 68 entities (and then indirectly to their consumers).

Economists generally favor a carbon tax because it can spread the costs of taking action against climate change across the entire economy. An industry player, such as power producers, may prefer that the costs of regulation be spread across all economic players rather than only themselves. This is one reason why the EPA, in the CPP, provided the use of a carbon tax as one option for states to use in compliance. In Washington, the Rule already is more stringent than the CPP, but unfortunately both the Rule and the CPP are locked in legal battles. If the Rule fails but the CPP survives, a carbon tax like that proposed by Measure 732 might be the best way for Washington to comply. 

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Friday, November 4, 2016

PURPA Haze Begins to Clear

By Ed Jewell, Energy Fellow
A recent opinion from the District Court of Massachusetts may help clarify an important provision in the Public Utility Regulatory Policies Act of 1978 (PURPA), an important law for renewable energy development. The case is Allco Renewable Energy v. Massachusetts Electric Co., and the provision at issue establishes a “legally enforceable obligation” (LEO).

PURPA is the original instigator of renewable energy grid interconnection in the United States. It is long running, under-appreciated, and is still as important as ever. PURPA provides an energy generating facility that meets certain size and resource restrictions (a qualifying facility or “QF”) with a set of guarantees. PURPA requires the utility in whose service area the QF is constructed to 1) allow the QF to plug into the utility’s grid, 2) buy the electricity generated by the QF, and 3) pay avoided cost rates for the electricity purchased.

In order to realize these guarantees, the Federal Energy Regulatory Commission (FERC)—the expert federal agency responsible for the statute—recognized that a QF developer would need to obtain financing in order to construct the project. In order for a QF developer to obtain financing, FERC created the concept of a LEO, which allows the QF developer to lock in what are known as avoided cost rates at the time a LEO is created with the utility. Avoided cost rates represent an approximation of the price that the utility would pay for power if it were to solicit proposals for a least-cost facility or construct such a facility on its own. With the avoided cost rate locked in, the QF developer is able to show a steady and predictable source of income throughout the term of the LEO, which she can take to the bank in order to obtain construction capital.

Quick review: under PURPA, a QF gets a LEO (a concept created by FERC) to show the bank in order to obtain construction capital to build its renewable energy facility. 

PURPA is an example of cooperative federalism, a regulatory model in which the federal government sets a standard that states must implement. However, one person’s implementation is another person’s evisceration. State PUCs have taken a variety of stances on how to implement PURPA ranging from diligent implementation to thinly veiled hostility aimed at slowing the development of renewable energy.

The quintessential example of a state PUC undermining PURPA through crafty rulemaking occurred in Texas, a rule that the Fifth Circuit Court of Appeals deferred to in Exelon Wind v. Nelson. As explained in more detail in GEI Director Melissa Powers’ previous Charged Debate blog post, the Fifth Circuit’s decision eviscerated the PURPA requirement that utilities purchase electricity from “each” QF. The Fifth Circuit did so by upholding a Texas PUC rule that only allowed QFs producing “firm” (ie, guaranteed) power to enter into a LEO with the utility. Solar and wind technologies without on-site energy storage, which is not yet economically available in most markets, do not meet the definition of firm power.

The Fifth Circuit reached this conclusion despite regulations that state “each” QF “shall” be entitled to sell its “electricity or capacity” to the utility. And, as explained in Staff Attorney Amelia Schlusser’s follow-up blogpost on the subject, the Fifth Circuit also failed to apply bedrock administrative law principles such as deference to the expert federal agency that authored the regulations. Exelon Wind thus demonstrates the analytical gymnastics that some state PUCs and federal courts are willing to engage in to maintain a closely held yet unsupported notion of states’ rights at the expense of sensible jurisprudence. The Exelon Wind decision misinterpreted the structure of the LEO provision, gave an undue amount of deference to the state PUC interpretation, and set a dangerous precedent that threatened to undermine the effectiveness of PURPA implementation around the country. 

Given the troubling Exelon Wind decision, it is heartening that the Allco Renewable opinion refused to follow the Fifth Circuit’s flawed analyses on deference and regulatory interpretation and instead decided to hew to a line more faithful to the language and purpose of PURPA and its implementing regulations. In Allco Renewable, the District Court of Massachusetts rejected the main contention of the Texas PUC, accepted in Exelon Wind, that the structure of the regulation that establishes a LEO must be read creatively so as to avoid superfluity. By denying the contention that the plain language of the regulation could not govern, the District Court of Massachusetts freed itself to interpret the language of the regulation sensibly. In doing so, the District Court of Massachusetts recognized that although state PUCs are entitled to “some deference” in implementing PURPA, “whatever latitude the MDPU is given to implement FERC’s PURPA rules does not justify an implementation that plainly conflicts with those rules.”
In order to allow the plain language to control, the District Court of Massachusetts answered—with the help of a FERC amicus brief—the question that stumped the Fifth Circuit, ie why would a QF entitled to a LEO not enter into a LEO? The court sensibly reasoned, “a QF that values flexibility and is willing to keep both upside and downside risks may choose an as-available sale even if a [LEO] is an option.”

The question in Allco Renewable was whether the PUC could set an avoided cost rate set according to the prevailing price on the New England ISO spot market. The court decided that allowing the PUC to do so would hollow out the guarantee of PURPA that each QF shall have the option of entering into a LEO with a price set at the time the LEO is entered into. The court recognized the importance of the LEO provision and the fixed avoided cost rate to the bankability of the project, and refused to allow the state PUC rule to undermine the critical function played by a LEO in implementing the mandates of PURPA.
The Fifth Circuit did not have the benefit of hearing from FERC in Exelon Wind. Under PURPA, FERC has the option to bring an enforcement action, either of its own volition or in response to a petition from a QF, intervene as a matter of right if it refuses to bring an enforcement action, or file an amicus brief stating its interpretation of the law. FERC’s failure to engage in any of these options left counsel for Exelon Wind in the awkward position of arguing for deference to a federal agency that did not bother to present itself in any manner before the court. In contrast, the Allco Renewable court makes note of FERC’s presence at the beginning of its opinion, “This Court relies extensively on the Brief of Amicus Curiae Federal Energy Regulatory Commission (“FERC”), which explains the relevant statutory and regulatory background.”

Thus, the Allco Renewable opinion is notable because 1) it cast doubt upon the reasoning of the Exelon Wind majority by diverging analytically and 2) FERC seems to have learned from the Exelon Wind decision that its guidance is necessary. 

PURPA and the FERC regulations implementing it are full of undefined terms, and energy law is a swampy mix of arcane statutes and regulations, economic considerations, and blurry federal/state jurisdictional lines. If FERC wants to disallow states from undermining the purpose of PURPA, it must at least file an amicus brief to explain the regulations and the reasoning behind the language to the judges who are not as steeped in energy law minutiae as FERC. When FERC provides its interpretation of the statute, it makes it much easier for the court to arrive at a logical conclusion.

While it is still too early to tell from one District Court opinion, there is now hope that the PURPA haze created by the Fifth Circuit will be cleared up and the statute will continue to be an important foundation to the renewable energy revolution. With a little bit of help from FERC, that is. 
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