Global Warming, Climate-Change Mitigation, and the Birth of a Regulatory Regime

Laura H. Kosloff and Dr. Mark C. Trexler

Laura H. Kosloff is Vice President and General Counsel and Mark C. Trexler is President of Trexler and Associates, Inc. (TAA), a Portland environmental and energy policy consulting firm providing services in the areas of climate-change mitigation, energy-facility siting, and natural resources law and policy. TAA developed the carbon-offset package for the city of Klamath Falls described in this Dialogue and advised the city on climate-change and carbon-offset issues during the contested case proceeding. TAA has been active in the development of carbon offsets and climate-change mitigation policy since its inception. Ms. Kosloff chairs the American Bar Association's Special Committee on Climate Change and Sustainable Development and is a former Associate Editor of ELR—The Environmental Law Reporter.

[27 ELR 10012]

In the July 1996 issue of News and Analysis, Richard Blaustein discussed the concept of joint implementation, a potentially important provision of the United Nations Framework Convention on Climate Change (FCCC).¹ In his Dialogue, the author summarized the history of joint implementation, the current debate over its future role as a mechanism for international climate-change mitigation, and some of its potential implications for private-sector companies here in the United States.

Joint implementation is one element of an increasingly complex framework that can legitimately be characterized as a nascent regulatory regime aimed at mitigating the threat of climate change.² As the scientific basis for more decisive policy action continues to firm, voluntary policy measures that are already in place in many countries may soon be supplemented by a legally binding international emissions-reduction protocol intended to "prevent dangerous anthropogenic interference with the climate system."³ That evolution toward this new regime has been by no means steady and even should be no surprise, given the technical characteristics of climate change as a public policy issue.

Most observers today agree that the transition from today's primarily voluntary carbon dioxide (CO₂) mitigation system to mandatory regulatory measures is more a matter of "when" and "how" than a matter of "if." Climate-change considerations and fear of future regulation already factor into many investment decisions around the world, particularly in the CO₂ intensive electricity sector.⁴ For example, in 1992, CO₂ mitigation was incorporated as a requirement of building a power plant for the first time.⁵ And in 1996, net CO₂ emissions were used as the basis for deciding which of three competing proposals for the construction of a new power plant in Oregon would be allowed to move forward without showing "need" for the electricity.

This Dialogue examines the policy and legal context surrounding the development of climate-change mitigation programs. It comes after a year of extensive domestic and international activity on the topic and as parties to the FCCC undertake the difficult and highly contentious task of negotiating a binding FCCC protocol. It comes at a time when advanced planning offers companies and industries the opportunity to position themselves favorably for when regulations are enacted and when CO₂ emitters ignore emerging climate-change policy at their own risk. With the United States responsible for more than five billion tons of CO₂ emissions in 1994—approximately 23 percent of the global total—there is no doubt that it will be significantly affected by the developing regime.

Developing Components of an International Regime

Evolution toward an international climate-change mitigation regime is proceeding on a number of fronts. These include increased scientific understanding of climate change, voluntary responses in the private sector, new governmental incentives, new types of intergovernmental cooperation, increasing study of the regulatory and market options that could achieve significant reductions in national emissions of greenhouse gas, and the entry of new and [27 ELR 10013] influential political actors into the debate. This section summarizes actions taking place on several of these fronts.

The Intergovernmental Panel on Climate Change

In response to the growing political visibility of climate change, in 1988 the United Nations requested the World Meteorological Organization and the United Nations Environment Programme to establish the Intergovernmental Panel on Climate Change (IPCC). The IPCC was given the task of reviewing the science of climate change, providing coordinated assessments of the potential impacts of climate change, and devising realistic adaptation and response strategies. Scientific groups and environmental organizations had previously carried out studies on climate change without formal governmental sponsorship or review. The United Nations established the IPCC to address governmental concerns about the potential for bias or environmental advocacy in these kinds of studies. Although non-governmental organizations participate in theIPCC's work, member governments manage the organization.

The IPCC issued its First Assessment Report in 1990.⁶ The report quickly gained political and technical acceptance as the authoritative scientific statement on climate change and helped build support for signing of the FCCC in 1992. The 1990 Assessment concluded that global mean surface temperatures have increased by 0.3 to 0.6 degrees Celsius (C) and that global sea levels have risen by 10 to 20 centimeters during the last 100 years. It predicted that "business as usual" emissions of greenhouse gases would result in 1.5 to 4.5 degrees C of warming and 65 centimeters of sea level rise by 2100—a rate of change unprecedented in human history. The report projected a temperature rise of closer to 1 degree C if greenhouse-gas emissions were subjected to aggressive controls. The report did not rule out surprises, including the possibility of sudden and highly disruptive climate shifts.

The IPCC's Second Assessment Report (SAR), issued in December 1995, has perhaps proven to be even more influential than the first.⁷ The SAR involved some 2,500 scientists and was the most comprehensive technical review ever undertaken on any subject. IPCC Working Group I, charged with reviewing the science of climate change, encompassed the work of more than 1,000 scientists. It concluded that "the balance of evidence suggests a discernible human influence on global climate."⁸ In 1990, when the IPCC issued its First Assessment Report, most experts believed it would not be possible to firmly identify a link between global climate change and human activities until the beginning of the next century, when scientists thought human-induced climate change would move out of the "background noise" of natural climatic variation. The IPCC's unprecedented conclusion in the SAR reflects rapid progress in global systems modeling, a rapid growth in scientific understanding, and a growing scientific consensus regarding climate change. The SAR is already having a palpable effect on policy efforts to address global warming and had significant impact at the Second Conference of the Parties to the FCCC (COP-2) in Geneva in July 1996.

The U.S. National Action Plan on Climate Change

As Blaustein noted, the 1993 U.S. Climate Change Action Plan proposed more than 50 initiatives to reduce greenhouse-gas emissions.⁹ These initiatives include supply- and demand-side energy-efficiency programs, methane capture, expanded tree planting, and urban forestry, among others. Congress never fully funded many of these initiatives, but several voluntary programs have achieved relatively high profiles.

The Climate Challenge program resulted in hundreds of utilities committing to a wide variety of voluntary measures to reduce, avoid, or sequester greenhouse-gas emissions. The Challenge was partially intended to show that CO₂ emissions could be reduced voluntarily and without formal regulatory mandates. Government and utility officials assert that Climate Challenge activities will reduce CO₂ emissions by the equivalent of over 150 million tons by the year 2000. Skeptics, however, argue that many of these tons are based on measures that would have taken place anyway and that they do not really contribute to achieving the U.S. goal of returning to 1990 emissions levels by the year 2000.

The Climate Wise program targets voluntary reductions in emissions of greenhouse gases in the industrial sector. Large participants include DuPont, Johnson & Johnson, AT&T, and Georgia Pacific. Small and medium-sized companies include Fetzer Vineyards, Quad/Graphics, Majestic Metals, and Etta Industries. Fetzer Vineyards estimates that by 2005 it will use half the amount of power it currently uses; by 2015 it plans to use 100 percent solar energy in all operations. By 2005, the company also hopes to use 100 percent recycled materials for all its packaging, including boxes, labels, and bottles, and to use non-toxic inks. At the end of 1995, the Climate Wise program included 12 participants representing 3.75 percent of total U.S. industrial energy use.¹⁰

The Motor Challenge program promotes the development, purchase, and management of efficient motors, drives, and motor-driven equipment. Voluntary industry participants include motor and drive manufacturers, utility companies, engineering and trade associations, and state governments. At the end of 1995, 1,000 companies had signed on to the program, representing 10 percent of the target industries.¹¹

Notwithstanding these and other voluntary programs, however, the United States will miss its year 2000 target. Energy-related CO₂ emissions in 1990 in the United States [27 ELR 10014] were 4,910 million metric tons of CO₂ equivalent. The latest official estimates from the Energy Information Administration for the year 2000 are 5,468 million metric tons of CO₂ equivalent, well above 1990 levels. This has fueled calls for mandatory emissions-reduction requirements.

The Growth of Carbon-Offset Projects

Because CO₂ is a global gas—a molecule emitted in one place can be anywhere within several days—it makes little difference for climate-change purposes where emissions and emissions reductions occur. CO₂ also differs from other pollutants in that it can be removed from the atmosphere through human intervention after being emitted, since green plants use CO₂ as fuel. These two characteristics have led to the development of a range of carbon-offset projects around the world, including those joint-implementation projects that have been funded. Although regulatory incentives to do so remain weak, a number of companies have undertaken significant climate-change mitigation projects, in the interest of favorable public and governmental relations, in order to come up the mitigation learning curve and to fulfill corporate commitments under the Climate Challenge and other programs. Offset projects currently underway include:

New England Electric Systems (NEES) is implementing a project designed to offset CO₂ emissions through reduced-impact logging in Malaysia. Presently, harvesting a relatively small number of marketable trees results in damage to a large proportion of the total forest. NEES estimates that overall carbon emissions during harvesting could be reduced by as much as 50 percent by removing vines before cutting, directional tree felling, and better planned extraction of timber on properly constructed and utilized skid trails.

Wisconsin Electric Power Company, Northern Indiana Public Service Co., and the Edison Development Company are assisting the city of Decin in the Czech Republic with the repowering of its heavily polluting Bynov Heating Plant. The repowered facility will be more efficient and will burn natural gas, dramatically reducing harmful emissions as well as CO₂. The project has been approved by the U.S. Initiative on Joint Implementation (USIJI).¹²

AES Corporation, an independent power producer (IPP), is pursuing carbon-offset projects totaling more than $ 6 million in the Amazon Basin, Guatemala, and Paraguay. AES's Guatemala project, undertaken in 1989, was the first carbon-offset project. It involves funding CARE efforts to promote social forestry and to slow deforestation in Guatemala.¹³ In Paraguay, AES helped fund establishment of a Nature Conservancy forest reserve in one of South America's last remaining major tracts of undisturbed dense tropical forest.

Tenaska, Incorporated, also an IPP, has funded $ 1 million in carbon offsets pursuant to its 1992 power sales agreement with the Bonneville Power Administration (BPA). Tenaska's contract with the BPA was the first time that a power-purchase agreement incorporated a requirement for CO₂ mitigation. Tenaska is pursuing two carbon-offset projects: a reforestation project in eastern Washington and a rainforest preservation project in Costa Rica. Tenaska's Costa Rica project is one of the funded USIJI projects.¹⁴

TransAlta Utilities, a Canadian utility, is investing in a project in India to strategically supplement the diets of milk-producing cattle to promote more efficient digestion and thereby decrease methane generation per unit head of cattle. This carbon-offset project includes research on molasses-urea block formulation and process technology issues, production of high-quality blocks, and an intensive marketing effort that involves recruiting and training village-based agents (predominantly women) to promote and sell the blocks and eventually operate as self-sustaining small-scale entrepreneurs. TransAlta is also undertaking a large-scale upgrading of the Indian electricity transmission and distribution system and projects a CO₂ benefit of more than 50 million tons.

PacifiCorp, a major western utility, has more than half a dozen offset projects underway domestically and internationally. PacifiCorp's carbon-offset projects have included reforestation projects in the Pacific Northwest, energy conservation through urban forestry in Salt Lake City, promotion of ethanol production for the transportation sector, and tropical forest protection in the country of Belize. The Belize project is USIJI-approved and includes The Nature Conservancy and several other utilities.¹⁵

A recent development is the creation of company consortiums to share the risk of offset project development. The UtiliTree Carbon Company, a consortium of 40 U.S. utilities, is funding five domestic and international forestry-based offset projects. The projects represent diverse approaches toward managing greenhouse gases, including rural tree planting, forest preservation, and forest management. Similar consortiums are being developed to promote renewable-energy development and energy-efficiency projects.¹⁶

Virtually all of the carbon-offset projects being pursued involve power companies. This is primarily because the electricity sector is by itself responsible for one-third of all U.S. CO₂ emissions and has for several years perceived itself as the first likely target of CO₂ emissions-reduction mandates.¹⁷ Participation in offset projects will multiply as additional categories of CO₂ emitters perceive themselves to be next in line.

First CO₂ Regulatory Proceeding Takes Place

Recently, an Oregon agency became the first regulatory body in the United States and perhaps the world to make [27 ELR 10015] a specific regulatory determination based on a proposed project's net greenhouse-gas emissions. The proceeding likely will have a significant impact on climate-change mitigation policy well beyond Oregon's borders.

In July 1995, the Oregon legislature passed a one-time legislative exemption from the state's "need-for-power" standard for up to 500 megawatts (MW) of power plants fired by natural gas.¹⁸ The exemption was spurred by the legislature's decision to revisit the state's "need for power" standard in light of ongoing deregulation of U.S. electricity markets. In its rule implementing the statute, the Oregon Energy Facility Siting Council (EFSC) provided that it would award the exemption to the facility with the least environmental impact.¹⁹ Environmental impacts would be evaluated in a tiered approach; the order of impact evaluation was air, water, and land use. The "best-of-batch" rule directed EFSC to proceed to the next tier only if applicants tied on a given impact or were not significantly different. For air emissions—the first tier—impacts would be assessed based on monetized net air emissions per kilowatt-hour (kWh). Air emissions expressly included CO₂, a nonregulated pollutant. Because the proposed facilities were all natural gas generating projects with roughly similar emissions per kWh, EFSC expected emissions-offset packages (particularly for CO₂) to play a key role in the proceeding. This expectation proved correct.

Three IPPs filed exemption applications: the city of Klamath Falls' Klamath Cogeneration Project (KCP), U.S. Generating's Umatilla Generating Company (UGC), and IdaWest's Hermiston Power Partnership (HPP). The three applications reflected unprecedented commitments of project resources to CO₂ mitigation, but involved different approaches to that mitigation:

Klamath Cogeneration Project: In addition to the CO₂ benefits associated with cogenerating steam for an adjacent timber mill from its proposed 305 MW plant, KCP committed to implement a carbon-offset portfolio composed of four different offset projects. The portfolio proposed spending $ 500,000 to expand rural solar electrification in developing countries; $ 1.5 million to reforest several thousand acres of land in western Oregon through the Oregon Forest Resource Trust; $ 1 million to capture and utilize methane at sewage treatment plants and coal mines; and $ 100,000 to expand the City of Klamath Falls' geothermal district heating system. KCP also committed to establish a $ 300,000 contingency fund to cover shortfalls in offset performance and to spend up to $ 50,000 per year to monitor and verify the performance of its climate change mitigation package.²⁰

Umatilla Generating Company: To reduce the net emissions of its proposed 400 MW facility, UGC proposed to wait several years before starting construction in order to purchase a higher efficiency turbine than is now commercially available and to use a conservation easement-based forest management program on up to 2,000 acres in Oregon and Washington. The easements were intended to change the management regime on the affected acres, delay harvest, and gradually increase stand age from 45 to 85 years.²¹

Hermiston Power Partners: To partially offset emissions of its proposed 470 MW facility, HPP proposed to supply cogenerated steam to a nearby potato processing plant, allowing that plant to shut down its older and inefficient steam boilers. It also committed to place $ 250,000 per year for 30 years (in 1996 dollars) into a climate-change mitigation fund from which CO₂ offset investments could be made at EFSC's discretion. HPP did not identify specific offset measures; it argued that the state could find offsets more cheaply, efficiently, and effectively than could the applicants themselves.²²

The Oregon proceeding was the first of its kind in several respects. It was the first time that CO₂ offsets were used in a regulatory proceeding. It was also the first time that CO₂ offset packages competed against each other in a multiparty, highly contested, administrative proceeding.²³ Finally, it involved the largest proposed monetary commitment to project-specific CO₂ mitigation ever seen. The proceeding included two rounds of interrogatories with over 800 questions, direct and rebuttal testimony by more than a dozen expert witnesses, a full week of public hearings generating 1,300 pages of transcripts, final briefs totaling 500 pages, and two days of oral argument in front of EFSC. It reflected the most thorough review of the carbon-offset concept and individual carbon-offset projects that has ever been carried out.

On July 23, 1996, EFSC awarded the exemption to the Klamath Project. The Council gave the Project credit for more than 7 million tons of carbon offsets and 2 million tons of CO₂ reductions associated with cogeneration. This amount reflected just over one-half the amount of offsets KCP had originally claimed; it is the equivalent of reducing the Project's net CO₂ emissions by at least 35 percent. The corresponding per kWh net emissions of CO₂ will be the lowest ever seen for a fossil fuel-fired electricity generating plant. The KCP mitigation package is also the largest CO₂ mitigation package ever proposed for a generating facility fired by fossil fuel. Environmental groups are pointing to the Oregon proceeding as evidence that CO₂ emitters can cost-effectively reduce their net emissions and argue that the proceeding should be widely replicated.

New Actors Entering the Climate-Change Debate

An important recent development in the politics of climate-change mitigation is the international insurance industry's entry into the political debate. Disturbed about a perceived increase in extreme weather events and natural disasters in recent years, the insurance industry has been increasingly vocal in promoting government action on climate change. The industry paid $ 57 billion for weather-related claims [27 ELR 10016] between 1990 and 1995, more than three times the $ 17 billion paid for similar claims in the preceding decade.²⁴ Franklin Nutter, president of the Reinsurance Association of America, has said that "the insurance industry is first in line to be affected by climate change … it could bankrupt the industry."²⁵ Representatives of the insurance industry were particularly active at COP-2 and released a position paper on climate change. Noting the IPCC's conclusion suggesting a "discernible" human impact on global climate, industry representatives made several key points:

The property insurance industry is the financial sector most likely to be directly affected by climate change, since it is most vulnerable to variability in the frequency and severity of extreme weather events.

The cost of extreme weather events could grow dramatically as a result of the enhanced greenhouse effect caused by human activities.

Since it is not possible to fully quantify the social and economic impacts of climate change, policymakers should adhere to a "precautionary principle" and undertake measures now to substantially reduce greenhouse gas emissions.²⁶

The economic and political influence of the global insurance industry is significant. Many observers are looking to the industry's rising involvement as an important forcing element for international policy action.

The Future of Joint Implementation

Blaustein provided an extensive review of the history of the joint-implementation concept for climate-change mitigation purposes. As he notes, the USIJI process was initiated in 1993 partly to test criteria that might later apply to an international joint-implementation program under the FCCC.²⁷ The USIJI was also intended to increase private-sector investment in developing countries and to help expand international markets for environmentally beneficial technologies. To date, the USIJI Secretariat has approved 15 projects. Creation of the USIJI framework, however, has not been accompanied by effective incentives to participate. U.S. policy, for example, does not yet state that companies that fund approved USIJI projects will receive credit for doing so under future emissions-reduction mandates. As a result, only a handful of the USIJI-approved projects have been able to secure funding.²⁸

Other national efforts to promote joint implementation have proceeded rapidly. Countries with official joint-implementation programs include Australia, Canada, Costa Rica, Denmark, Finland, Germany, Iceland, Japan, the Netherlands, Norway, Sweden, and the United States.²⁹ Individual countries or companies interested in carbon offsets are implementing climate-change mitigation projects in more than 30 countries around the world. The types of information reported from these projects, and their adherence to potential future regulatory criteria, vary widely. Their success or failure, however, will help determine whether the current "activities implemented jointly" (AIJ) pilot phase will evolve into an officially regulated joint-implementation program as part of a future greenhouse-gas emissions reduction regime.

The AIJ Pilot Phase

Article 4.2(a) of the FCCC states that "Parties may implement such policies and measures [that limit their anthropogenic emissions of greenhouse gases] jointly with other Parties and may assist other Parties in contributing to the achievement of the objective of the Convention."³⁰ As Blaustein noted, the meaning of this language is far from clear.³¹ Debate over the language has been highly political. Despite concerns raised by some developing countries and the environmental community, the First Conference of the Parties (COP-1) adopted the AIJ pilot phase (a voluntary joint-implementation pilot program), in Berlin in March 1995.³²

Both industrialized and developing countries may participate in the pilot phase. COP-1 left open the types of projects that parties may pursue and the criteria that they must meet. These issues will be revisited during an evaluation period sometime between 1997 and the year 2000. Joint-implementation activities during the pilot phase will not be credited toward industrialized countries' existing commitments (which, in most cases, require a return to 1990 emissions levels by the year 2000). This does not, however, prevent domestic crediting of joint-implementation efforts under yet-to-be-developed national crediting programs. COP-1 stipulated that joint-implementation financing is to be additional to financial obligations of developed countries and existing official development assistance flows.³³ This result reinforces the crucial role of the [27 ELR 10017] private sector in any success the joint-implementation system is to achieve.

AIJ and joint implementation were a subject of discussion among governmental delegates to COP-2 in Geneva in July 1996. After this meeting, it remains evident that the terms of any transition from an AIJ pilot phase to a joint-implementation operational phase around the year 2000 are far from clear. A Secretariat report on the AIJ pilot phase noted that individual countries' AIJ programs have generally adhered to the AIJ project criteria that COP-1 originally adopted.³⁴ However, the criteria of emissions additionality and cost-effectiveness "have been much less explicitly adopted."³⁵ Insufficient information exists to determine the additionality and costs for many of the current projects, leading to charges that the pilot phase represents little more than "business as usual" on the part of industrialized countries and their corporate interests.

A Joint-Implementation Operational Phase

Discussions at COP-2 demonstrated that numerous practical issues must be resolved before the FCCC can implement a full-fledged joint-implementation program. The FCCC process has yet to establish standard methodologies for calculating emissions reductions and cost-effectiveness, mechanisms for verifying emissions reductions, or even standard reporting formats. Concerns exist about the large number of current energy-based AIJ projects, the additionality of which is questionable or difficult to determine. These issues will need to be resolved before the parties can address the most critical issue—how to officially credit emissions reductions. In addition, a good deal of political resistance toward joint implementation remains among developing countries. Some countries continue to argue that regardless of the AIJ pilot phase, the operational joint-implementation phase should be limited to Annex 1 industrialized countries.³⁶ If such a limitation is implemented, many cost-effective emissions reductions would be off limits to the joint-implementation system. Although AIJ policy is developing rapidly, significant hurdles remain to incorporating a true joint-implementation regime as part of an eventual emissions-reduction protocol.

Future Trends and Implications for the Private Sector

The future direction of global-warming policy is still unclear. Given the rapid pace of scientific and policy development on climate-change issues, it is difficult to predict the precise shape of any future policy regime, which will result from a complex interaction of efforts at international, national, local, and private levels. Greenhouse-gas emitters have until now faced nebulous reduction incentives, but imposition of emissions caps or implementation of CO₂ trading within the next several years is likely to change that.

Binding Targets Move Closer to Reality

Although at COP-1 in 1995 the FCCC parties called for adoption of a binding protocol as early as 1997, there has been considerable uncertainty regarding their ability to do so. Several industrialized and oil-producing countries remain opposed to any binding commitments, arguing that the costs of meeting them would be unjustifiably high given the inconclusive state of climate science. The IPCC's SAR, however, provides ammunition to those calling for immediate, binding commitments to address greenhouse-gas emissions. It has weakened the position of those countries and groups trying to use scientific uncertainty to impede policy development; as a result, a protocol with binding emissions reduction targets is much closer to reality now than it was before the SAR.

Although the FCCC entered into force only two years ago, discussion of mandatory national emissions targets for greenhouse gases dominated COP-2 in July 1996. Most countries at the meeting, including the United States, advocated adopting the 1995 IPCC report as the basis for swift policy movement toward binding and enforceable emissions targets. Shifting its previous negotiating position, the United States actively called for legally binding post-2000 emissions-reduction targets. U.S. Undersecretary of State for Global Affairs Timothy Wirth stated:

In our opinion, the IPCC has clearly demonstrated that action must be taken to address this challenge and that, as agreed in Berlin, more needs to be done through the Convention…. We believe that circumstances warrant the adoption of a realistic but binding target, leaving it to individual governments to decide the most appropriate measures needed to meet the agreed target.³⁷

The Conference concluded with the "Geneva Declaration," a statement signed by more than 100 countries.³⁸ The Declaration strongly endorsed the IPCC's conclusions and agreed with the IPCC's finding that continued increases in greenhouse-gas concentrations "will lead to dangerous interference with the climate system."³⁹ The parties agreed to continue to work toward a treaty protocol to be signed in Japan in 1997 that will involve "legally binding" objectives and "significant" reductions in emissions.

Any protocol that is signed inevitably will fall far short of the 70 percent annual emissions reduction scientists say would be required to stabilize CO₂ at current levels; nonetheless, it would be a huge policy step and would have major consequences in the United States and around the world. New binding targets would supersede the widespread use of voluntary targets and voluntary emissions-reduction programs currently prevailing in the United States and other countries. As is the case with the United States, most countries that set voluntary targets will fail to achieve them.

[27 ELR 10018]

A Tradable Permit System for CO₂ by 2000?

The United States, in arguing in Geneva for a binding commitment that would provide maximum flexibility to countries trying to cut their emissions, linked its support for an international protocol to development of an international tradable permits system. As a step in the direction of global CO₂ trading, the United States advocated CO₂ trading among industrialized countries as early as the year 2000. Several international studies have recently concluded that a CO₂ trading system is the most economically efficient way to achieve significant emissions reductions.⁴⁰ Air emissions trading allows firms to meet emissions caps by trading emission credits or allowances. Firms with lower abatement costs can over-comply and sell excess reductions to firms with higher abatement costs. The total cost of compliance is thus reduced, while the target level of emissions is maintained. There are many practical barriers to the implementation of even a domestic trading system as early as the year 2000, but the push for such trading is building rapidly. Clearly, a CO₂ trading system would not follow the sulfur dioxide model and be limited to utilities; instead, it would encompass all significant CO₂ emitters.

Conclusions

Policies and measures for CO₂ reduction, including emissions caps and tradable permits, are currently being discussed domestically and internationally. Although its precise form is hard to predict, a CO₂ regulatory regime is likely to continue to evolve within the next several years. Companies that may have something to sell in a CO₂ trading system should be thinking about it now, when rights can be created that may have future dollar value; companies facing possible environmental liabilities under a mandatory CO₂ emissions-reduction regime should also be thinking about these issues now, while the costs of CO₂ offsets are still quite low and the market is malleable. Many companies are following precisely this course, particularly in the energy sector. But power producers such as investor-owned utilities and IPPs are not the only ones who stand to benefit from acting now; any significant greenhouse-gas emitter can reap significant public relations and governmental relations benefits by participating in the upcoming policymaking process and pursuing even pilot-scale offset projects.

1. Richard Blaustein, Joint-Implementation Essentials for Lawyers, 26 ELR 10364 (July 1996). 1992 U.N. Framework Convention on Climate Change, June 12, 1992, 31 I.L.M. 849 (entered into force Mar. 21, 1994) [hereinafter FCCC].

2. See Mark C. Trexler, CO₂: The Pollutant of the 1990s, presented at the American Bar Association's 23d Annual Conference on Environmental Law in Keystone, Colorado, Mar. 10-13, 1994 (unpublished manuscript, on file with authors).

3. FCCC, supra note 1, art. 2, para. 1.

4. Ralph Cavanaugh of the Natural Resources Defense Council put electric utilities on notice in a 1993 article that the potential CO₂ liability associated with new facilities can exceed the construction cost of the facilities and that the utilities should be concerned about the prudence of such investments. See Ralph Cavanaugh, Utilities and CO₂ Emissions: Who Bears the Risks of Future Regulation?, ELECTRICITY J., Mar. 1993, at 64.

5. Tenaska, Inc., an independent power producer based in Omaha, Nebraska, has funded $ 1 million in carbon offsets pursuant to its 1992 power sales agreement with the Bonneville Power Administration to construct a natural gas-fired facility near Frederickson, Washington. Tenaska is pursuing carbon-offset projects in eastern Washington and in Costa Rica.

6. INTERGOVERNMENTAL PANEL ON CLIMATE CHANGE, CLIMATE CHANGE: THE IPCC SCIENTIFIC ASSESSMENT (1990); INTERGOVERNMENTAL PANEL ON CLIMATE CHANGE, CLIMATE CHANGE: THE IPCC RESPONSE STRATEGIES (1990); INTERGOVERNMENTAL PANEL ON CLIMATE CHANGE, CLIMATE CHANGE: THE IPCC IMPACTS ASSESSMENT (1990).

7. INTERGOVERNMENTAL PANEL ON CLIMATE CHANGE, CLIMATE CHANGE 1995: THE SCIENCE OF CLIMATE CHANGE (1996); INTERGOVERNMENTAL PANEL ON CLIMATE CHANGE, CLIMATE CHANGE 1995: ECONOMIC AND SOCIAL DIMENSIONS OF CLIMATE CHANGE (1996); INTERGOVERNMENTAL PANEL ON CLIMATE CHANGE, CLIMATE CHANGE 1995: IMPACTS, ADAPTATIONS AND MITIGATION OF CLIMATE CHANGE (1996).

8. CLIMATE CHANGE 1995: THE SCIENCE OF CLIMATE CHANGE, supra note 7, at 4-5.

9. PRESIDENT WILLIAM J. CLINTON & VICE PRESIDENT AL GORE JR., THE CLIMATE CHANGE ACTION PLAN (1993) [ELR Order No. AD-139].

10. U.S. DEPARTMENT OF ENERGY, ENERGY PARTNERSHIPS PROGRAM 21 (1995).

11. Id. at 23.

12. U.S. JOINT INITIATIVE ON JOINT IMPLEMENTATION, ACTIVITIES IMPLEMENTED JOINTLY: FIRST REPORT TO THE SECRETARIAT OF THE U.N. FRAMEWORK CONVENTION ON CLIMATE CHANGE 89 (1996) [hereinafter USIJI REPORT].

13. MARK C. TREXLER ET AL., FORESTRY AS A GLOBAL WARMING MITIGATION STRATEGY: AN ANALYSIS OF THE GUATEMALA CARBON SEQUESTRATION FORESTRY PROJECT (1989).

14. USIJI REPORT, supra note 12, at 62

15. Id. at 26.

16. UtiliTree Carbon Company, UtiliTree Carbon Company Funds Five Projects to Manage CO₂, press release, August 5, 1996; International Utility Efficiency Partnerships, Inc., What Should Be the Role of Electricity Producers in Joint Initiatives to Benefit the Environment? (1996) (material available from Edison Electric Institute, Washington, D.C., and on file with authors).

17. Nonutility interest groups, however, should be far from complacent. With the transportation sector and the combined industrial/commercial/residential sectors each accounting for another third of U.S. CO₂ emissions, they will not be able to avoid being pulled into the regulatory system that ultimately develops.

18. OR. REV. STAT. § 469.501(2) (1995).

19. OR. ADMIN. R. 345-23-010(2) (1995).

20. Klamath Energy, Inc., Application for Exemption From Need for Facility Determination, proceeding before the Oregon Energy Facility Siting Council (filed Mar. 1, 1996).

21. Umatilla Generating Co., Request for the 500 MW Exemption From the Demonstration of Showing Need for Power, proceeding before the Oregon Energy Facility Siting Council (filed Mar. 1, 1996).

22. Hermiston Power Partnership, Request and Proposal for Exemption From Need for Facility Determination Under the 500 MW Exemption Rule, proceeding before the Oregon Energy Facility Siting Council (filed Mar. 1, 1996).

23. The rulemaking itself was challenged in the Oregon Supreme Court before the contested case proceeding even started. Hermiston Power Partnership v. Energy Facility Siting Council (Or. Sup. Ct. No. S42939, filed Jan. 12, 1996). The challenge is pending.

24. CHRISTOPHER FLAVIN & ODIL TUNALI, CLIMATE OF HOPE: NEW STRATEGIES FOR STABILIZING THE WORLD'S ATMOSPHERE 6 (1996).

25. Franklin W. Nutter, speech made at Conference on Financing Strategies for Renewable Energy and Efficiency, New York, New York, May 11, 1994; see also FLAVIN & TUNALI, supra note 24, at 6.

26. Statement of Environmental Commitment by the Insurance Industry, made at the Second Conference of the Parties to the FCC, Geneva, Switzerland, July 1996 (on file with authors).

27. See Blaustein, supra note 1, at 10366-67.

28. One exception to this is Tenaska, Inc.'s, ECOLAND project in Costa Rica. With Tenaska's $ 500,000 and additional monies from the nongovernmental organization Rainforests of Austria, plus a matching grant from the National Fish and Wildlife Foundation, approximately 6,000 acres of private inholdings within Piedras Blancas National Park have been purchased for permanent preservation. The Nature Conservancy forest project in Belize mentioned earlier also has funding.

29. JOINT IMPLEMENTATION Q., June 1996, at 14.

30. FCCC, supra note 1, art. 4(a).

31. Blaustein, supra note 1, at 10365.

32. Report of the Conference of the Parties on its First Session, held at Berlin from 28 March to 7 April 1995, Addendum, Part Two: Action Taken by the Conference of the Parties at its First Session, FCCC/CP/1995/7/Add.1, Decision 5/CP.1 (June 6, 1995).

33. Id. at para. 1(e). Although additionality can generally be thought of as the "but for" test (would a particular project have occurred "but for" the JI funding), the precise meaning of the concept or the extent to which additionality should be required is still an ongoing discussion. The USIJI defines additionality as involving "specific measures to reduce or sequester greenhouse gas emissions initiated as the result of the U.S. Initiative, or in reasonable anticipation thereof," and specifies that a project must be "above and beyond what would reasonably have been or likely to occur otherwise." U.S. Initiative on Joint Implementation, Final Ground Rules for USIJI (1994); U.S. Initiative on Joint Implementation, Guidelines for a USIJI Project Proposal (1994).

34. U.N. Framework Convention on Climate Change, Conference of the Parties, Second Session, Review of the Implementation of the Convention and of Decisions of the First Session of the Conference of Parties, Activities Implemented Jointly: Annual Review of Progress Under the Pilot Phase, FCCC/CP/1996/14 (1996).

35. Id. at 7.

36. Annex I consists of "developed country Parties and others included in Annex I." FCCC, supra note 1, art. 4(2).

37. Timothy Wirth, Statement at the Second Conference of the Parties to the FCCC in Geneva, Switzerland, July 17, 1996, at 2 and 5 (on file with authors).

38. U.N. Framework Convention on Climate Change, Conference of the Parties, Second Session, Geneva, 8-19 July 1996, Review of the Implementation of the Convention and of Decisions of the First Session of the Conference of Parties, Ministerial Declaration. FCCC/CP/1996/L.17 (1996).

39. Id. at 2.

40. UNITED NATIONS CONFERENCE ON TRADE AND DEVELOPMENT, CONTROLLING CARBON DIOXIDE EMISSIONS: THE TRADEABLE PERMIT SYSTEM (1995); ERIK HAITES, TRADABLE PERMITS AND CARBON TAXES: COST-EFFECTIVE POLICY RESPONSES TO GLOBAL WARMING (1993). See also U.S. DEPARTMENT OF ENERGY, POLICIES AND MEASURES FOR REDUCING ENERGY RELATED GREENHOUSE GAS EMISSIONS: LESSONS FROM RECENT LITERATURE 7-24 TO 7-27 (1996).