A Quick Economic Stimulus Meets a Slow Environmental Process - Are NEPA Waivers Needed to Reach Energy Independence?

Posted on January 30, 2009 by Bradley Marten

President Obama has pressed Congress this week to enact an economic stimulus package that would “double our capacity to generate alternative sources of energy like wind, solar, and biofuels . . . and build a new electricity grid that lay down more than 3,000 miles of transmission lines to convey this new energy from coast to coast.”[i] On Wednesday, January 28, 2009, the House passed the American Recovery and Reinvestment Act of 2009 (H.R. 1), which contains nearly $15 billion in capital investments and loan guarantees for renewable energy projects and new electric transmission lines, and $18.5 billion for energy efficiency programs.  The Administration’s stated goal is to spend this money in the next 18 months. This may be possible for the energy efficiency projects such as weatherizing homes and government buildings.  But for dozens of new wind farms and thousands of miles of transmission lines, it is not, and a good part of the reason is that those projects have yet to undergo environmental review or receive necessary permits.



[i] These remarks came in the President’s first weekly address, which was delivered on Saturday, January 24, 2009. The address can be viewed at this link.

 

Typically, siting a transmission line, wind farm, or other major energy facility involves obtaining a long list of environmental permits, each of which has a review process that can be used by opponents of the project to delay and sometimes defeat it. Moving infrastructure projects forward quickly will only be possible if Congress and the Administration speed up the environmental review and permitting process.  

In a January 26, 2009, report, the Congressional Budget Office estimates that it will take up to seven years to spend the money that H.R. 1 dedicated to expanding alternative energy. Experience teaches that this estimate may be overly conservative. For example, the Arrowhead-Weston Transmission Project, a 220 mile transmission line from Wisconsin to Minnesota, took nine years to permit and construct, even though all but 50 miles of it were in existing transmission line corridors. Southern California Edison’s Tehachapi Transmission Project, a 250 mile transmission project to deliver electricity generated from wind farms in Southern California, took over 10 years to design, permit, and begin construction. Indeed, portions of the project are still undergoing environmental review by the U.S. Forest Service and others.

Recently, California Governor Arnold Schwarzenegger requested up to $44 billion for transportation, energy and water projects in California, claiming that these projects will create as many as 800,000 new jobs.  Knowing that traditional environmental review would slow short-term job creation, Governor Schwarzenegger asked the Obama Administration to “waive or greatly streamline National Environmental Protection Act requirements consistent with our statutory proposals to modify the California Environment Quality Act for transportation projects.”

The proposal drew immediately fire from environmental groups. In a January 13, 2009, letter to House and Senate Democratic leaders, the Environmental Defense Fund, the Natural Resources Defense Council, the League of Conservation Voters and Environment California called Governor Schwarzenegger’s proposal “unproductive and harmful” to the federal debate over reviving the economy.  “Inevitably, in the course of congressional consideration, special interests will assert that we cannot afford the NEPA process in a time of national urgency,” they said.  “The truth is that we cannot afford that kind of leap-before-you-look rashness.” 

The new Administration must navigate this tension – quickly addressing the economic crisis while maintaining the integrity of the environmental review process. Doing so will require identifying ways that environmental review and permitting can be streamlined and modernized, alongside the infrastructure system.  We ought to be able to get wind farms and bridges and light rail built in a time frame that provides the short-term stimulus our economy needs, and also allow for sufficient environmental review to make sure our resources are protected.   This article lays out some of the options the new Administration may wish to consider as it seeks to balance job creation with environmental stewardship.

Approaches for Streamlining the Environmental Review Process

Use Existing Provisions Allowing Temporary Waivers

 

Many environmental regulatory statutes contain waivers of applicable requirements in response to natural disasters or other emergency conditions.  For example, the Stafford Disaster Relief and Emergency Assistance Act authorizes NEPA waivers to facilitate prompt responses to natural disasters.[1]  Similarly, the White House Council of Environmental Quality (CEQ) is authorized to approve “alternative arrangements” allowing federal agencies to modify or limit NEPA review in response to natural disasters.[2]  Other federal environmental laws with emergency response provisions include the Clean Water Act[3] and CERCLA.[4]

In response to Hurricane Katrina, CEQ approved expedited NEPA review procedures for certain U.S. Army Corps of Engineers flood control projects.  EPA temporarily waived certain Clean Water Act, Clean Air Act, and other environmental regulations in Katrina’s wake.  Both Louisiana and Mississippi issued similar emergency administrative orders, temporarily suspending certain environmental regulations to facilitate clearing hurricane debris and other emergency response actions.

Waivers Based on Grounds of National Security

In 2002, after the Natural Resources Defense Council obtained a preliminary injunction halting the U.S. Navy’s use of a low-frequency, active, surveillance towed array sonar system,[5] President Bush issued a “Presidential Exemption from the Coastal Zone Management Act,”[6] in order to “ensure effective and timely training of the United States naval forces in anti-submarine warfare using mid-frequency active sonar.”  The Presidential exemption allowed the Navy to train and certify strike groups capable of deployment “in support of world-wide operational and combat activities, which are essential to national security.”

The United States Supreme Court upheld the President’s action, finding that the public interest in adequately training the Navy’s antisubmarine forces “plainly outweighs” conservationists’ interests in studying marine mammals that may be injured by sonar exercises.[7]

Legislative Exemptions for Specific Projects

 

Congress has also periodically either limited or exempted review under NEPA and other environmental statutes for specific projects or categories of projects.  For example, the Energy Policy Act of 2005 modified the environmental compliance requirements for a broad range of energy-related projects.  The modified environmental compliance measures included:

  • Establishing a rebuttable presumption that certain oil and gas projects conducted on federal land are categorically exempted from NEPA review (§ 390);
  • Exempting hydraulic fracturing in aid of oil, gas, and geothermal energy extraction from certain requirements in the Safe Drinking Water Act (§ 322);
  • Exempting oil and gas exploration, production, and transportation construction projects from the Clean Water Act’s construction stormwater regulations (§ 323);
  • Requiring EPA and federal land management agencies in Western states to develop a pilot project to expedite environmental review and permitting under NEPA, the ESA, the Clean Water Act, and other federal statutes (§ 365);
  • Expediting the permitting process for natural gas facilities located on federal lands (§ 366); and
  • Shortening the time frame for appealing permitting decisions under the Coastal Zone Management Act (§ 381).

Congress has also exempted or provided limited NEPA review for other projects, for example:

·        The TransAlaska Pipeline was exempted from NEPA review after completion of the initial EIS (43 U.S.C. § 1625(d));

·        Certain actions taken pursuant to the Clean Air Act are exempted from NEPA review (15 U.S.C. § 793(c)(1));

·        Department of Energy decisions to grant or deny exemptions from regulations governing fuel use at coal-fired power plants are exempted from NEPA review (42 U.S.C. § 8473);

·        For certain retrievable radioactive waste storage projects, an Environmental Assessment (as opposed to an EIS) constitutes sufficient compliance with NEPA (42 U.S.C. § 10155(c)(2)(A));

·        Alternate environmental review procedures have been established for determining surface transportation rights-of-way in the Arctic National Preserve (42 U.S.C. § 410hh(4)(d); and

·        Certain Department of Housing and Urban Development funding decisions are exempt from NEPA review, based on certification of compliance with state and local laws (42 U.S.C. § 3547(2)).

Using Streamlined Environmental Review to Address Economic Conditions

 

While legislative, regulatory, and executive precedent exists for either waiving or limiting environmental review, those precedents have rarely been used to justify waiving environmental review on the grounds of an economic crisis.[8]  But precedent exists for using “alternative arrangements” for environmental review in response to economic concerns.  In 1980, after General Motors threatened to build a new manufacturing facility outside the city limits unless the city cleared and delivered an appropriate site for the facility, the City of Detroit declared a state of emergency based on an economic crisis.  In September 1980, CEQ approved an “alternative arrangement” under NEPA allowing the Department of Housing and Urban Development to release loan guarantee funds prior to the completion of NEPA review.[9]

The challenge for the new Administration and Congress is to strike a balance between expediting environmental review while maintaining sufficient oversight to prevent bad decision making.  Options to achieve that goal include: (1) expediting funding for “shovel ready” projects which already have undergone federal and state environmental review and obtained necessary permits; (2) using programmatic environmental review of project categories that would obviate the need for project-specific (and often redundant) environmental reviews; (3) providing limited exemptions or streamlined environmental review for specific categories of projects; and (4) limiting judicial review of final agency approvals for projects funded by the stimulus bill, while providing for oversight, review, and approval by CEQ.

For more information, please contact Bradley Marten



[1] See 42 U.S.C. § 5159.

[2] 40 CFR § 1506.11.

[3] Under 40 CFR § 122.3, the President or an agency acting with delegated Presidential authority may grant a waiver of the NPDES requirement if necessary to address substantial threats to public health or welfare. EPA invoked this exception in response to Hurricane Katrina. Another exception is 40 CFR § 122.41(n), which allows a wavier in the event of an “upset,” which is the temporary failure to comply with NPDES permit conditions based on factors that are beyond the reasonable control of an operator, for example, a power failure or a large spill of contaminants into a collection and treatment system.

[4] CERCLA provides the President and EPA with broad authority and flexibility to undertake response actions whenever there is a release or threatened release of a hazardous substance which presents an imminent and substantial danger. See 40 CFR § 300.400(e)(1).

[5] See NRDC v. Evans, 232 F. Supp.2d 1003 (N.D. Cal. 2002) (for more information on this decision, see Colleen C. Karpinsky, A Whale of a Tale: The Sea of Controversy Surrounding the Marine Mammal Protection Act and the U.S. Navy’s Proposed Use of the SURTASS-LFA Sonar System, 12 Penn St. Envtl. L. Rev. 389 (2004)).

[6] Per its terms, the Presidential Exemption was based on the “Constitution and the laws of the United States, including section 1456(c)(1)(B) of title 16, United States Code.”

[7] Winters v. Natural Resources Defense Council, Inc., 555 U.S. ___, 129 S. Ct. 365 (2008).

[8] While NEPA allows agencies to allow “alternative arrangements” suspending or modifying environmental review, CEQ regulations limit their applicability to “actions necessary to control the immediate impact of the emergency.” 40 CFR § 1506.11 (emphasis supplied).

[9] Although the full NEPA review was eventually completed, the “alternative arrangement” allowed HUD and the city to expedite project activities in response to an economic crisis. The facts of the Detroit “alternative arrangement” are summarized at Crosby v. Little, 512 F. Supp. 1363 (E.D. Mich. 1981).

More Clean Water Act Citizen Suits on the Way?

Posted on January 20, 2009 by Fournier J. Gale, III

At least in the Southeast, the popularity of Clean Water Act citizen suits has waxed and waned over the course of the Act’s 37 year history. However, our firm’s environmental practice group began to see a renewed interest in citizen suits a couple of years ago, and a recent decision by the Eleventh Circuit Court of Appeals may lead to an even greater resurgence.

 

In Black Warrior Riverkeeper, Inc. v. Cherokee Mining, LLC, the Eleventh Circuit held that a citizen suit may proceed against a defendant for alleged violations of the Clean Water Act despite the state environmental agency’s commencing an administrative enforcement action before the citizen suit was filed. 548 F.3d 986 (11th Cir. 2008). Riverkeeper, an environmental organization supporting the preservation of the Black Warrior River watershed in Alabama, filed suit in 2007 against Cherokee Mining, an owner and operator of two coal mines in northern Alabama, for alleged illegal discharges to navigable waters in violation of the company’s permit. Pursuant to the Act, Riverkeeper first sent Cherokee Mining a “60-day notice letter,” notifying the company of its intent to file suit in federal court. The state environmental agency then commenced enforcement by issuing an administrative consent order, and Riverkeeper filed its suit in the Northern District of Alabama shortly thereafter.

 

            Cherokee Mining filed a Motion to Dismiss Riverkeeper’s suit for lack of subject matter jurisdiction under Section 309 of the Act which precludes citizen suites when a state agency has commenced and is diligently prosecuting an administrative enforcement action against a defendant. Riverkeeper responded by pointing to what until now has been a largely overlooked provision in Section 309 stating that the citizen suit bar does not apply to actions filed after a citizen gives its notice of intent to sue prior to commencement of an administrative enforcement action and the citizen actually files suit “before the 120th day after the date on which such notice is given.” 33 U.S.C. § 1319(6)(B)(ii). Based on language found elsewhere in Section 309, Cherokee Mining argued that this 120-day exception only applies to federal, not state, administrative enforcement actions. The district court rejected this argument and held that Riverkeeper’s suit could go forward because it met the Act’s notice of intent to sue requirements. Holding that Cherokee Mining’s interpretation of the statute “was an extremely cramped and narrow reading of the ordinary and plain meaning of the relevant language” in the Act, the Eleventh Circuit affirmed the district court’s decision. Cherokee Mining petitioned the Court for panel or en banc rehearing, and the petition was denied on January 8, 2009. There has been no word yet as to whether Cherokee Mining plans to appeal the case to the U.S. Supreme Court.

 

            Until now, no Circuit Court has ever addressed the 120-day rule on which Riverkeeper successfully relied as an exception to the bar on citizen suits filed after the commencement of state administrative enforcement actions. Prior to the Eleventh Circuit’s decision, state agencies routinely initiated successful administrative enforcement actions once notified of a citizen suit, and the citizen either did not file suit or had their case dismissed pursuant to Section 309 of the Act.  Certainly for companies operating in Alabama, Georgia, and Florida, the rules have now changed. Entities faced with both a citizen suit and state administrative enforcement action have a much lower incentive for resolving the matter by coming into compliance and paying state penalties when they may be required to later pay citizens’ attorneys fees and Clean Water Act statutory penalties (up to $32,500 per day per violation) or even be required to comply with court-ordered injunctive relief that may be at odds with whatever the state would have required. Because state environmental agencies recognize the dilemma regulated entities face as a result of this decision, states are also going to have to alter their strategies in dealing with potential noncompliance of clean water regulations by industry. Because administrative consent decrees will be less palatable to regulated entities, the state will have to weigh whether or not to go to the added expense (in terms of dollars and resources) of filing a lawsuit in state court.

 

            This state of affairs is not likely to go unnoticed by citizen groups throughout the country. As counsel for Riverkeeper stated after the Court issued its opinion—“this changes everything.” With the increase in “60-day notice” letters we’ve seen being sent to entities just in Alabama in the last few months, it’s hard to disagree.

 

For more information, a copy of the Eleventh Circuit’s decision can be found at http://www.ca11.uscourts.gov/opinions/ops/200810810.pdf

Superfund Liability and Apportionment - Burlington Northern v. United States

Posted on January 20, 2009 by Theodore Garrett

Although the Superfund statute is now 28 years old, basic issues of liability and apportionment of liability remain unresolved. This term, the U.S. Supreme Court will decide a case with broad implications for CERCLA liability, Nos. 07-1601 and 07-1607, Burlington Northern v. United States. These consolidated cases, which will be argued early in 2009, raise important issues concerning the circumstances under liability is divisible and the scope of “arranger” liability under CERCLA.  If the Ninth Circuit’s approach is upheld, the heightened evidentiary standards may impose a difficult hurdle on parties to prove reasonable apportionment of liability. The Ninth Circuit’s approach to “arranger” liability is of concern to entities that sell chemicals or other products in the ordinary course of business. The allocation of risk and provisions for insurance and best practices to avoid spills in contracts between suppliers and common carriers may need to be reviewed in light of the Supreme Court’s opinion in this case. 

 

Although the Superfund statute is now 28 years old, basic issues of liability and apportionment of liability remain unresolved. This term, the U.S. Supreme Court will decide a case with broad implications for CERCLA liability, Nos. 07-1601 and 07-1607, Burlington Northern v. United States. These consolidated cases, which will be argued early in 2009, raise important issues concerning the circumstances under liability is divisible and the scope of “arranger” liability under CERCLA.  If the Ninth Circuit’s approach is upheld, the heightened evidentiary standards may impose a difficult hurdle on parties to prove reasonable apportionment of liability. The Ninth Circuit’s approach to “arranger” liability is of concern to entities that sell chemicals or other products in the ordinary course of business. The allocation of risk and provisions for insurance and best practices to avoid spills in contracts between suppliers and common carriers may need to be reviewed in light of the Supreme Court’s opinion in this case. 

 

                                    Background

A now-defunct company, Brown & Bryant, Inc. (B&B), owned and operated a facility at which chemicals were stored and distributed. The B&B operations were conducted in part on land owned by two railroad companies. Some of the chemicals used by B&B were supplied and delivered by Shell Oil Company. The U.S. Environmental Protection Agency (EPA) and the State of California’s Department of Toxic Substances Control (DTSC) brought suit under CERCLA to recover their response costs.

 

In 1996, the EPA and the State filed CERCLA actions against B&B, the Railroads, and Shell for reimbursement of their investigation and cleanup costs.   The district court, after a twenty-seven day bench trial, issued a detailed, 191-page decision holding the Railroads liable under CERCLA § 9607(a) as owners of the facility and as persons who “at the time of disposal of any hazardous substance owned or operated any facility at which such hazardous substances were disposed of.”  Shell was held liable under CERCLA § 9607(a)(3)as a “person who ... arranged for disposal ... of hazardous substances.”  

 

The district court found that the harm to the site was capable of apportionment.  The parties had not provided arguments concerning apportionment, leaving the district court to independently perform the equitable apportionment analysis. For the Railroads, the district court multiplied three proportions: (1) the percentage of the overall site that was owned by the Railroads, 19.1%; (2) the percentage of time that the Railroads leased the parcel in relation to B&B’s total operations, 45%; and (3) the fraction of hazardous products attributable to the Railroad parcel, 66%. This calculation resulted in a determination of 6% liability.  To account for any “calculation errors,” the district court assumed 50% error and raised the Railroads’ proportion of the total liability to 9%. For Shell, the district court approximated the volume of spills of Shell’s product attributable to Shell, and set Shell’s proportion of the total liability at 6%. 

 

The State and EPA appealed the district court’s judgment.  Shell cross-appealed the finding that it was liable as an “arranger” under CERCLA. The federal district court held the Railroads and Shell liable for a minor portion of the total cleanup costs. The agencies appealed. A panel of the Ninth Circuit affirmed the portion of the judgment that imposed liability on Shell as an arranger and reversed the portion of the judgment that declined to impose joint and several liability on the Railroads and Shell. 

 

The Supreme Court granted certiorari. The questions presented are whether the 9th Circuit correctly (1) affirmed the district court’s ruling that Shell is liable as an arranger and (2) reversed the district court’s apportionment of liability. The case is scheduled to be argued early in 2009.

 

                                    The Ninth Circuit’s Decision

 

A panel of the Ninth Circuit affirmed the portion of the judgment that imposed liability on Shell as an arranger and reversed the portion of the judgment that declined to impose joint and several liability on the Railroads and Shell, holding that petitioners did not satisfy their burden of proof on apportionment. United States v. Burlington Northern & Santa Fe Railway, 502 F.3d 781 (9th Cir. 2007), as amended 520 F.3d 918 (9th Cir. 2008). The amended opinion was issued to accompany a denial of en banc review, which prompted an unusual dissent by eight Ninth Circuit judges including the Chief Judge.

 

Apportionment of Liability. The Ninth Circuit notes that § 433A(1) of the Restatement allows for apportionment of damages where “(a) there are distinct harms or (b) there is a reasonable basis for determining the contribution of each cause to a single harm.” 520 F.3d at 934-35.  

On the facts presented, the court found no dispute on the first, purely legal question -- whether the harm is capable of apportionment, but held that the district court erred in finding that there was a “reasonable basis” apportioning the harm based on percentages of land area, time of ownership, and types of hazardous products.  The Ninth Circuit held that there was no evidence linking these factors to the proportion of leakage, contamination, or cleanup costs. 520 F.3d at 945-46. With respect to Shell, the Ninth Circuit similarly found that the evidence relied on by the district court was too speculative to determine the amount of leakage of Shell’s chemicals.  520 F.3d at 946-47.

 

“Arranger” Liability. The Ninth Circuit rejected Shell’s arguments that the district court applied the wrong legal standard in determining whether Shell was an “arranger.”  The Ninth Circuit held that the useful product cases do not apply in this case because “Shell arranged for delivery of the substances to the site by its subcontractors; was aware of, and to some degree dictated, the transfer arrangements; knew that some leakage was likely in the transfer process….” 520 F.3d at 950. The Ninth Circuit cited evidence that spills occurred every time the deliveries were made; that Shell arranged for delivery and chose the common carrier that transported its product to the site; that Shell changed its delivery process so as to require the use of large storage tanks, that Shell reduced the purchase price of the chemicals to reflect loss from leakage; and that Shell distributed a manual and created a checklist to ensure that the chemical tanks were operated in accordance with Shell’s safety instructions. 520 F.3d at 950-51.

 

The Dissent. The order denying the petition for rehearing en banc provoked a strong dissent by Judge Bea, joined in by seven judges including the Chief Judge. The dissent cites the detailed factual findings made by the district court and states: “If this evidence does not provide a ‘reasonable estimate’ for apportionment of liability, I do not see how -- short of ‘perfect information’ sufficient to trace every molecule of pollution to the landlord’s parcel -- apportionment could ever be possible under CERCLA.”  520 F.3d 953. The dissent was equally critical of the panel’s imposition of “arranger” liability on Shell, stating: “The panel’s imposition of arranger liability on a mere seller, which relinquished control over its products upon delivery and before spillage occurred, goes far beyond the statutory language and creates inter-and intra-circuit splits.” 520 F.3d 954.

 

Issues Before The Supreme Court

1. Apportionment of Liability.  Petitioner Burlington Northern argues that the Ninth Circuit’s analysis of apportionment departs from common-law principles, which allow for rough apportionment based on reasonable assumptions. The Ninth Circuit has pushed the “polluter pays” principle in CERCLA beyond all rational limits. Burlington argues that imposing joint and several liability in all but extraordinary cases, as the Ninth Circuit’s reasoning would dictate, would raise a multitude of constitutional problems, citing Eastern Enterprises v. Apfel, 524 U.S. 498 (1998).

 

The United States counters petitioners failed to even attempt to identify and prove a reasonable basis for apportionment and the Supreme Court should not relieve petitioners of the consequences of their litigation strategy. Further, the United States argues that a district court does not have the same “broad discretion” in determining whether and how liability should be apportioned. 

 

2. “Arranger” Liability.  Shell Oil Company argues that “arranger” liability may not be imposed on a manufacturer who merely sells and ships, by common carrier, a commercially useful product, transferring ownership and control to a purchaser who causes contamination involving that product.  Any inadvertent spillage that occurred was the result of the transfer of a useful product, thus Shell cannot be said to have arranged for the discard of waste. Shell did not own the chemicals at the time of any disposal. Shell also argues that a company should not be penalized for providing its customers with a safety manual and other information for the safe handling of its products.

 

The United States argues that Shell is liable because it entered into transactions that it knew would directly result in disposals of hazardous substances. The government’s brief emphasizes that Shell inserted itself over the transfer process by hiring the common carriers used for delivery and because the common carriers used equipment required by Shell. Lack of intent to dispose of a hazardous substance does not preclude arranger liability, the United States argues, where the arranger has advance knowledge of the disposal. 

 

                                    Conclusion

In cases where there is a significant orphan share, the failure to apportion liability may result in the imposition of liability for the entire cleanup cost on parties with minimal responsibility.  If the Ninth Circuit’s approach is upheld, the heightened evidentiary standards may impose a difficult hurdle on parties to prove reasonable apportionment. Alternatively, the Supreme Court might decide the issue on narrow grounds suggested by the United States, namely that petitioners failed to offer evidence concerning apportionment and thus did not meet their burden of proof.

The Ninth Circuit’s approach to “arranger” liability is of concern to entities that sell chemicals or other products in the ordinary course of business. Does every sale and delivery of a useful product potentially subject the supplier to CERCLA liability if leakage or spills occur? If not, how does one draw the line?  Should arranger liability attach only when the sole purpose of a transaction is for disposing a hazardous substance?  The allocation of risk and provisions for insurance and best practices to avoid spills in contracts between suppliers and common carriers may need to be reviewed in light of the Supreme Court’s opinion in this case. 

 

Theodore Garrett is a partner in the law firm Covington & Burling LLP in Washington, D.C. and is Co-Chair of the firm's environmental practice group. His practice involves major regulatory and enforcement issues and transactions, particularly involving air quality, water quality, hazardous waste, and natural resource damages. He has been lead industry counsel in numerous cases seeking judicial review of EPA air and water regulations and has represented clients in numerous Superfund matters. Mr. Garrett advises clients on compliance and related business issues and has been extensively involved in administrative proceedings and litigation, including Supreme Court cases. Mr. Garrett has spoken and written widely in the environmental area. He is the editor and principal author of The Environmental Law Manual and the RCRA Compliance Manual, and is a contributing author to Environmental Litigation and The Clean Water Act Handbook. Mr. Garrett served as a U.S. Supreme Court law clerk to Chief Justice Warren Burger.  He is past Chair of the ABA Section of Environment, Energy and Resources. Mr. Garrett was honored as the Environmental Lawyer of the Year 2008 by Who’s Who International.

 

Contact Information: tgarrett@cov.com or (202) 662-5398

MIDWEST GREENHOUSE GAS REDUCTION ACCORD RECOMMENDATIONS CONTINUE TO ADVANCE

Posted on January 20, 2009 by David Flannery

The Advisory Groups working on the Midwest Greenhouse Gas Reduction Accord and the Midwest Governor’s Association Platform met in Indianapolis on January 14 and 15, 2009 for the purpose of advancing the development of recommendations for a regional program to reduce greenhouse gases. While the program being developed contemplates a regional cap and trade program, much work is being focused on the development of complimentary policies that would be implemented outside the cap and trade program. 

 

            The December 2008 draft recommendations of the Advisory Group, calls for a cap and trade program that would be applied to all six greenhouse gases. Initially, the cap and trade program would apply to electricity generation and imports, industrial combustion sources, and industrial process sources for which there are credible measurement in monitoring protocols. In addition, transportation fuels are being considered for inclusion in the cap and trade program based on the results of economic modeling that is currently being performed. Heating fuels will be included in the second three year compliance period. 

 

Significantly, the cap and trade program would be applied both to electricity generated within the region and to electricity imported into the region. In the latter case, the point of regulation for the program would be entity that first delivers electricity into a participating jurisdiction for consumption in that jurisdiction. The Commerce Clause implications on such an approach have yet to be tested. 

            Allowances under the cap and trade program are proposed to be distributed for climate related purposes. Among the purposes that have been identified by the Advisory Group are: 

  • accelerating transformational investments; 
  • mitigating transitional adverse impacts of the program; and
  • addressing harmful impacts due to climate change.

Individual states would be called upon to make a determination as to whether allowances would be auctioned or allocated for free. 

 

            Offsets would be encouraged under the draft recommendations for entities not covered by the cap and trade program. The Advisory Committee has yet to determine how much of the cap could be met by offsets, although a range of 10-50% are being considered. The final value would be set once economic modeling data becomes available. Initially, offsets would be limited to those which occur within the states and provinces that elect to participate in the program. 

 

            Beyond the cap and trade program, the recommendations contemplate the development of complimentary measures that would reduce greenhouse gas emissions. These complimentary measures include, among other things:

  • energy efficiency; 
  • low carbon fuels; 
  • management of vehicle miles; 
  • biomass;
  • renewable electricity; 
  • transmission planning and siting; and
  • carbon capture and storage. 

These potential policies are now being evaluated with economic modeling. The Advisory Group received a report this week on the results of the modeling of the base or reference case. Efforts will not turn to modeling policy cases. It is anticipated that the policy cases to be modeled will include: 

·        the cap and trade program alone;  

·        the complimentary measures alone; and

·        the combination of the cap and trade program and complimentary measures. 

It is anticipated that the results of this modeling will be available by the time the Advisory Group meets in March at a date and location that have not yet been determined. 

Final recommendations are expected to be issued during the third quarter of 2009. 

 

For more information regarding these activities, visit www.midwesternaccord.org.

Environmental Site Assessment Flexibility or Further Complexity? EPA Adopts Forestland and Rural Property Phase I Standard Practice

Posted on January 16, 2009 by Charles Efflandt

On December 23, 2008, EPA issued a direct final rule amending the “All Appropriate Inquiries Rule” [Standards for Conducting All Appropriate Inquiry]by adopting ASTM International’s “Standard Practice for Environmental Site Assessment Process for Forestland or Rural Property” (ASTM E2247-08) [EPA Amendment to AAI Rule]. ASTM E2247-08 was published after EPA promulgated the All Appropriate Inquires (AAI) rule and is specifically tailored to conducting Phase I environmental site assessments of large tracts of rural and forestland property. EPA’s action incorporates the ASTM E2247-08 forestland and rural property assessment practices as a federal standard for establishing the AAI component of the bona fide prospective purchaser, contiguous property owner and innocent landowner defenses to CERCLA owner/operator liability.

 

The AAI Rule as originally promulgated referenced and recognized as compliant ASTM E1527-05, which provides practices for conducting AAI of commercial real estate. ASTM E2247-08 is a variant of the original standard that focuses on the environmental assessment of greater than 120 acres of forestland or rural property or property with a developed use of only managed forestland and/or agriculture. Users of the forestland and rural property Phase I practices are intended to include the forest industry, conservation organizations, natural resource industries and rural real estate professionals and lenders.

 

Although the Forestland or Rural Property Standard is over 40 pages in length, EPA admits that the differences between this standard and the standards incorporated in the original AAI Rule are few and relatively insignificant.

 

Generally, the forestland and rural property practices offer the “Environmental Professional” more options to satisfy the site reconnaissance component of the Phase I assessment to, in part, alleviate the burden of visually inspecting these large properties. Also, the 120 acres (or more) that qualify the property for this standard need not be contiguous, provided all parcels are part of the same transaction and have substantially the same land use. Minor differences in the “past and present owner/occupant” interview requirements also exist that take into account the nature and use of these properties.

 

Both the original Rule and ASTM E2247-08 require the Phase I “User” to search for environmental liens and collect other information reasonably ascertainable to the User. Although the original Rule does not mandate disclosure of this information to the Environmental Professional, ASTM E2247-08 requires that such information be disclosed.

 

ASTM E2247-08 also includes a more extensive list of potentially applicable historical records and offers guidance on “beyond scope” assessments particularly relevant to forestland and rural property such as endangered species and non-point source assessment considerations.

Conceptually, a modified Phase I assessment practice for large tracts of forestland and rural property makes sense. However, EPA’s recent amendment to the AAI Rule provides that a purchaser of forestland or rural property within the scope of ASTM E2247-08 need not use the practices in that standard. Rather, such purchasers may continue to follow the provisions of the original Rule and ASTM E1527-05.

 

That being the case, and given that the new forestland and rural property standard is in many respects more stringent than the original Rule, it is debatable whether this amendment of the Rule actually provides focus, efficiency and useful flexibility to the assessment of these types of properties or simply adds another layer of confusion and complexity for property purchasers and Environmental Professionals to evaluate.

On Financial Markets and Environmental Regulation

Posted on January 14, 2009 by Kevin Finto

I save the instructions for an item so I can try to figure out what is wrong when it breaks. Given the state of our financial markets, I went looking for the instructions. I couldn’t find a copy of Adam Smith’s nine hundred page, two volume set The Wealth of Nations, first published in 1776. I did; however, find the next best thing: P.J. O’Rourke’s On the Wealth of Nations, (Atlantic Monthly Press 2007), a concise 250 page explanation that is both informative and entertaining. In reading through O’Rourke’s summary, I noted that Smiths three principles that determine market behavior (i.e, pursuit of self interest, division of labor and freedom of trade) explain a lot about why the markets currently are frozen up. We have had perhaps too much of all three, and too much of a good thing rarely turns out well.  Being an environmental lawyer, it also struck me that unintended consequences of current environmental regulations might be at least in part responsible for our current financial situation.  Finally, given the change in administrations, it occurred to me that the interplay between the market economy and environmental regulation and policy will continue, so we need to be smart about it.  

 

Adam Smith identified three critical aspects of proper market function that have been called his “invisible hand.” The first is that people act in their own self interest. This is the basic motivation for capital investment, risk taking and human labor. The second is that we get more productivity and higher quality of life if there is a division of labor such that the people who are good at things do them and those that are not pay the people who are good to do them for them. Third, and the one most important to our discussion, is that the less regulation on trade among the people doing these specialized tasks, the better. Smith was, of course, most concerned about tariffs and their effect on international trade, but certainly any regulation imposes some friction on the markets.

This brings us to the question of how environmental regulation may have caused, at least in part, the current financial crisis. To make this point it is helpful to think of financial markets, which we want to be “fluid,” like a system of tanks and pipes in a waterworks.  Water is analogous to money in this example.  Adam Smith’s first principle, self interest, is a motivating force, like a pump in our system. The second principle, division of labor, is a set of pipes which are sized according to the amount of economic activity they carry (Wal-Mart is a bigger diameter pipe than say your local shoe repair shop). Regulations are analogous to valves that restrict flow in the system. 

 

Both water in a pipe and money in our financial markets follow the path of least resistance. Putting aside questions about excessive self interest (read greed) and excessive division of labor (read opaqueness or lack of accountability) which may have contributed to the financial meltdown, regulations played a role as well.   Just as valves can direct the flow of water in a system, regulations direct the flow of money in our economy. Traditional, capital intensive, economic multiplying investment opportunities, say in energy infrastructure or manufacturing facilities, have faced stringent regulation which imposed significant resistance to that investment opportunity -- small pipes with lots of valves. On the other hand, many financial investment vehicles offered little or no resistance; they were big pipes with no valves. Guess where the money flowed? 

 

            So what implications does this have for future environmental policy or regulation. With a change in parties in the adminstration, the old debate between those favoring market based regulation and those favoring command and control is rekindled. As the new administration considers economic stimulus packages and regulations on environmental impacts, it will be well served to understand that it is not only the absolute amount of regulation, but also the relative amount of regulation, on economic options can have a significant impact on the markets as well as unintended consequences. Moreover, while terms like “free market” and “markets forces” may be derogatory in some circles, the reality is that market-based environmental programs have worked so well. No one can seriously debate the success of the acid rain program far more productive than command and control regulations would have been in that situation.  The reason is that market-based programs rely on the same human nature that Adam Smith recognized in his first principle and that gets our entrepreneurial and creative juices flowing.  That is what is needed to solve economic and environmental problems.  Ignoring market concepts in environmental regulation only leads to unintended consequences, conflict and gridlock, which the markets and we can no longer afford.

The Role of States in Climate Change Regulation

Posted on January 14, 2009 by Roger Ferland

50 Ariz. L. Rev. 674-938 (2008)

 

            The primary function of the articles produced to date for this blog has been to alert colleagues of current developments of which they should be aware. This article’s purpose, however, is broader. There appear on occasion in law reviews and other publications valuable perspectives on law and policy issues in areas like climate change that are worthy of attention but might escape notice. The above-referenced symposium is such a document. In the spirit of full disclosure, it should be noted that the authors of the majority of the articles are law professors and consequently it is necessary to wade through a great deal of legal theory to glean the valuable nuggets of insight that are prevalent throughout the document.

 

The basis theme of the articles and commentaries is that states have a significant and critical role to play in the reduction of greenhouse gases (GHGs) even after the likely enactment of federal cap-and-trade legislation during the next two years. That role would not seem to be immediately apparent, particularly if EPA proceeds to fill those areas of regulation not covered by cap-and-trade legislation by maximizing the agency’s scope of regulation of GHG’s under the Clean Air Act. Indeed, several of the authors concede that, following national legislation, the climate benefits of state initiatives “would be so small as to be undetectable.” Nevertheless, the authors suggest that states and localities will continue to have a unique and important role to play, not so much in directly achieving reductions in GHGs through regulation, but by providing or encouraging the mechanisms to indirectly achieve those reductions. This facilitation role takes a number of forms:

  • State or local support of research and development of new renewable energy and innovative GHG control technologies through targeted subsidies and tax credits
  • Continuation and expansion of renewable portfolio standards imposed by state public utility regulatory bodies
  • State-level energy efficiency standards
  • Green building codes and certification systems
  • Gap-filling environmental regulation that forces the adoption or diffusion of existing technologies

            The articles also provide a comprehensive treatment of the potential legal barriers and drawbacks to state actions. One of those drawbacks that is discussed by several of the authors is the cost externalization produced by individual state initiatives. The most cited example of a cost externalization is the push by California and other states allied with California for automotive emission standards for GHGs. While California’s actions seem laudable on their face and it is likely that EPA will grant the waiver that California needs to enforce the standards, the cost of complying with the standards will ultimately be borne by the rest of the country even though they had no say in their adoption.

            The primary legal barriers to state action are preemption and its allied concept, the so-called dormant Commerce Clause. The range of legislation currently before Congress addresses preemption by either expressing a clear intent to broadly preempt state initiatives as far as GHG regulation or no preemption language thereby leaving it up to the federal courts to apply general principles of preemption to specific state actions. The authors tend to favor limiting the applicability of preemption, particularly when the state action does not directly impair the sale of allowances or does not directly impair the functioning of the other mechanisms necessary for a successful national cap-and-trade program. Thus, such state measures as renewable energy portfolio requirements, measures that encourage technological innovation or diffusion of existing technology and even product efficiency standards that are more restrictive than national standards, should not be subject to being invalidated because of preemption. Conversely, state restrictions on the sale or purchase of emissions allowances even as part of the direct regulation of GHG emissions would probably be preempted by federal legislation.

            A similar analysis is followed concerning the applicability of the dormant Commerce Clause to state climate change initiatives. A state’s regulations that directly discriminate between, for example, in-state and out-of-state electric utility companies, particularly if the effect of such discrimination was to interfere with the functioning of the national cap-and-trade program, would clearly run afoul of the dormant Commerce Clause. However, the range of state measures discussed in the articles would not seem to raise either dormant or general Commerce Clause issues, particularly if the national legislation, as seems likely, contains a savings clause like that in Section 116 of the Clean Air Act that explicitly allows states to adopt “standards or limitations” that are more stringent than federal standards or limitations.

            Obviously, the foregoing vastly oversimplifies what are a number of complex topics and their analyses, but it should provide enough of an overview of the content of the symposium to motivate interested parties to pursue the full benefit of its articles. As all of the authors note, it was the states, in the absence of federal action, that have been the leaders in GHG regulation and it is their initiative, experience and expertise that ensure that they will have a role and continued interest in addressing climate change even in the face of federal legislation.

The Role of States in Climate Change Regulation

Posted on January 14, 2009 by Roger Ferland

50 Ariz. L. Rev. 674-938 (2008)

 

            The primary function of the articles produced to date for this blog has been to alert colleagues of current developments of which they should be aware. This article’s purpose, however, is broader. There appear on occasion in law reviews and other publications valuable perspectives on law and policy issues in areas like climate change that are worthy of attention but might escape notice. The above-referenced symposium is such a document. In the spirit of full disclosure, it should be noted that the authors of the majority of the articles are law professors and consequently it is necessary to wade through a great deal of legal theory to glean the valuable nuggets of insight that are prevalent throughout the document.

 

The basis theme of the articles and commentaries is that states have a significant and critical role to play in the reduction of greenhouse gases (GHGs) even after the likely enactment of federal cap-and-trade legislation during the next two years. That role would not seem to be immediately apparent, particularly if EPA proceeds to fill those areas of regulation not covered by cap-and-trade legislation by maximizing the agency’s scope of regulation of GHG’s under the Clean Air Act. Indeed, several of the authors concede that, following national legislation, the climate benefits of state initiatives “would be so small as to be undetectable.” Nevertheless, the authors suggest that states and localities will continue to have a unique and important role to play, not so much in directly achieving reductions in GHGs through regulation, but by providing or encouraging the mechanisms to indirectly achieve those reductions. This facilitation role takes a number of forms:

  • State or local support of research and development of new renewable energy and innovative GHG control technologies through targeted subsidies and tax credits
  • Continuation and expansion of renewable portfolio standards imposed by state public utility regulatory bodies
  • State-level energy efficiency standards
  • Green building codes and certification systems
  • Gap-filling environmental regulation that forces the adoption or diffusion of existing technologies

            The articles also provide a comprehensive treatment of the potential legal barriers and drawbacks to state actions. One of those drawbacks that is discussed by several of the authors is the cost externalization produced by individual state initiatives. The most cited example of a cost externalization is the push by California and other states allied with California for automotive emission standards for GHGs. While California’s actions seem laudable on their face and it is likely that EPA will grant the waiver that California needs to enforce the standards, the cost of complying with the standards will ultimately be borne by the rest of the country even though they had no say in their adoption.

            The primary legal barriers to state action are preemption and its allied concept, the so-called dormant Commerce Clause. The range of legislation currently before Congress addresses preemption by either expressing a clear intent to broadly preempt state initiatives as far as GHG regulation or no preemption language thereby leaving it up to the federal courts to apply general principles of preemption to specific state actions. The authors tend to favor limiting the applicability of preemption, particularly when the state action does not directly impair the sale of allowances or does not directly impair the functioning of the other mechanisms necessary for a successful national cap-and-trade program. Thus, such state measures as renewable energy portfolio requirements, measures that encourage technological innovation or diffusion of existing technology and even product efficiency standards that are more restrictive than national standards, should not be subject to being invalidated because of preemption. Conversely, state restrictions on the sale or purchase of emissions allowances even as part of the direct regulation of GHG emissions would probably be preempted by federal legislation.

            A similar analysis is followed concerning the applicability of the dormant Commerce Clause to state climate change initiatives. A state’s regulations that directly discriminate between, for example, in-state and out-of-state electric utility companies, particularly if the effect of such discrimination was to interfere with the functioning of the national cap-and-trade program, would clearly run afoul of the dormant Commerce Clause. However, the range of state measures discussed in the articles would not seem to raise either dormant or general Commerce Clause issues, particularly if the national legislation, as seems likely, contains a savings clause like that in Section 116 of the Clean Air Act that explicitly allows states to adopt “standards or limitations” that are more stringent than federal standards or limitations.

            Obviously, the foregoing vastly oversimplifies what are a number of complex topics and their analyses, but it should provide enough of an overview of the content of the symposium to motivate interested parties to pursue the full benefit of its articles. As all of the authors note, it was the states, in the absence of federal action, that have been the leaders in GHG regulation and it is their initiative, experience and expertise that ensure that they will have a role and continued interest in addressing climate change even in the face of federal legislation.

An Update on AIG Environmental and the Current Environmental Insurance Market

Posted on January 6, 2009 by David Farer

Significant management changes announced this week by AIG Environmental, and further news in the wake of that announcement, may further impact the changing environmental insurance market. 

 

Joe Boren, longtime Chairman and CEO of AIG Environmental, and John O'Brien, President of the Company, have both resigned. On January 5, AIG Commercial Insurance issued a statement that Russ Johnston has been named President and CEO of AIG Environmental, and that Kim Hanna is now Executive VP and COO of the Company.

 

Over the past ten years, environmental insurance products have been utilized as a key component in many brownfield redevelopment projects and real estate transactions, and have become a common risk-reduction tool in the real estate and manufacturing sectors.

 

Most recently, the leading players in the environmental insurance market have been AIG Environmental, XL Environmental and Ace, with AIG most active in writing cost-cap and pollution legal liability ("PLL") policies for real estate transactions and brownfields projects. Zurich has also played an important role in the market, although historically the company has been particularly risk-adverse. Chubb has been writing PLL policies, but not cost-cap policies.

 

In recent months, however, Zurich has been indicating an enhanced interest in considering the underwriting of projects and transactions that they might previously have declined. Chubb has also expressed an interest in growing its PLL portfolio.

 

Additionally, in the aftermath of AIG's statement on the management changes, the Bermuda-based insurer Ironshore, Inc. announced on January 6 that Joe Boren and John O'Brien have joined a newly established Environmental Insurance division of Ironshore in New York City, with Boren as CEO and O'Brien as President.

 

The impact of AIG’s recent and highly publicized financial woes, and the ensuing reductions in the ratings of AIG's insurance companies, have generated a good deal of speculation about the future of AIG Environmental and whether the Company would maintain its aggressive underwriting of brownfields projects and real estate deals.

 

It is yet to be seen whether the financial problems of the parent company and   management-level changes at AIG Environmental are leading to an overall change in approach, but with XL and Ace still in the market, Zurich and Chubb expressing a greater interest in underwriting, and Ironshore opening a new environmental division with experienced management, there may be more options available to those seeking such policies, and greater competition on policy terms and pricing.