Paris Agreement Exit: Who Holds the Real Power?

President Trump announced on June 1 that the United States is withdrawing from the Paris Agreement. The announcement follows months of uncertainty about whether President Trump would fulfill his campaign pledge to withdraw U.S. participation in the deal (which was signed by 195 countries with only two countries in opposition--Nicaragua (because it wasn’t stringent enough) and Syria).

According to the President, the decision is necessary to protect the U.S. economy from burdensome emissions restrictions and foreign interference in U.S. energy policy:

In order to fulfill my solemn duty to protect America and its citizens, the United States will withdraw from the Paris climate accord . . .[s]o we're getting out, but we will start to negotiate, and we will see whether we can make a deal that’s fair.

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EPA Haze Rule – U.S. Court of Appeals for the 5th Circuit Stays EPA From Implementing Final Haze Rule in Texas and Oklahoma.

The federal Clean Air Act requires the states and the federal government to establish and meet targets for visibility in protected national parks and wildlife areas through regulations that control air pollutants in ambient air. 42 U.S.C. §§ 7410, 7491, 7492(e)(2). The federal government has the primary responsibility for identifying air pollutants and setting standards. The states, however, bear the primary responsibility for implementing those EPA standards by promulgating state implementation plans ("SIPs"). In accordance with the Act, the EPA issued a Regional Haze Rule in 1999 requiring states (1) to develop implementation plans by the end of 2007 for the 2009–2018 period and (2) to submit revised plans every ten years thereafter. 40 C.F.R. § 51.308(b), (f).

In January 2009, EPA found that Texas and Oklahoma (and several other states) had missed the 2007 deadline. Texas and Oklahoma subsequently submitted plans which were partially disapproved by EPA. In 2014, EPA proposed substitute federal plans and later issued its Final Rule in 2016. 81 Fed. Reg. 296 (Jan. 5, 2016). Claiming that the EPA was improperly targeting coal-fired power plants, the State of Texas, power plants, numerous energy companies, state regulators, and others filed a petition to review the Final Rule in the U.S. Court of Appeals for the 5th Circuit ("5th Circuit"). State of Texas v. U.S. Environmental Protection Agency, Case No. 16-60118. On July 15, 2016, the 5th Circuit issued an order denying EPA's motion to dismiss or transfer of venue of the petition, finding that:

• The 5th Circuit, which encompasses Texas, has jurisdiction to review the Final Rule pursuant to the Clean Air Act, 42 U.S.C. § 7607(b)(1);
• Venue in the 5th Circuit is proper because the petitioners' challenge addresses locally or regionally applicable action under the Act; and,
• Because staying implementation of the Final Rule was warranted, the 5th Circuit granted petitioners' motion for a stay pending resolution of the petitions for review on the   merits.

Because the EPA's actions involve 37 other states in other federal circuits, this matter may see inconsistent analyses by the several federal circuit courts and require final resolution by the U.S. Supreme Court.

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Unintentional Misconduct and Standardless Discretion: The Department of Interior’s New Rules for Valuing Oil, Gas and Coal

The Office of Natural Resources Revenue (ONRR) within the Department of the Interior issued new royalty valuation rules on July 1, 2016. Although the goal of the regulations is to simplify the calculation of royalties on federal oil, gas and coal, the 65 pages of rules please no one. Under a new definition for “misconduct,” normally considered to require some degree of intent, misconduct now “means any failure to perform a duty owed to the United States under a statute, regulation, or lease, or unlawful or improper behavior, regardless of the mental state of the lessee or any individual employed by or associated with the lessee.” 30 C.F.R. § 1206.20. Although ONRR can pursue civil penalties only if the misconduct is intentional, in the case of unintentional misconduct connected with a royalty valuation, such as a simple reporting error, ONRR can impose its own valuation.

ONRR has also added a controversial default provision allowing ONRR to substitute its own oil valuation for that reported by a lessee based on actual arm’s-length contracts. Decried by industry as “standardless” ONRR discretion and “second-guessing of arm’s-length contracts,” the provision lacks specific criteria for determining what is a reasonable valuation and gives ONRR the power to impose its own valuation based on “any information we deem relevant.” 30 C.F.R. §§ 1206.101 and 1206.105. Many companies are concerned that the lack of specific criteria for valuation will create uncertainty and act to discourage development of federal minerals.

While industry is not pleased with the new rules, neither is the environmental community, which submitted over 190,000 petition signatures during the public comment period urging the government to “keep it in the ground.” ONRR declined to act, however, stating that a decision to halt federal fossil fuel production was beyond the scope of this rulemaking.

The Final Rule, which takes effect on January 1, 2017, may be found here.

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2016 Wyoming Energy Plan – Doubling Down on Coal

In the face of a radically altered economic and energy picture for Wyoming, Governor Matt Mead released an updated energy strategy for the State on March 14, 2016. Titled “Leading the Charge: Wyoming’s Action Plan for Energy, Environment, and Economy,” the plan is an update of a similar report issued by the State in 2013, the first of its kind in the nation. The State is facing significant budget challenges from the loss of royalty income, severance taxes, and jobs from low oil and gas prices and the even more dramatic decline of coal mine revenue as key coal mining companies in the State seek bankruptcy protection. Approximately 60% of State government revenues come from mineral development.

Gov. Mead proposes to meet the budget challenges by addressing the backbone of the State’s economy – energy development. The 2013 report set forth 45 initiatives, 28 of which have been completed, and the 2016 strategy adds several new priorities. Emphasizing his commitment to the coal industry, the Governor summed up his approach as “a doubling down on coal and a very good start on renewables.” Specifically, the energy plan includes:

• A “carbon innovation” effort for the development of “clean coal” technologies by building on the success of the Integrated Test Center, a public-private partnership with the XPRIZE, to develop and test new technologies for the capture of CO2 emissions.
• Harnessing Wyoming’s Class 5-7 wind energy resources with a new Wind Energy Manufacturing Initiative, led by the Wyoming Business Council. The goal would be to attract wind turbine manufacturing to the State.
• Hosting a symposium to explore how to turn the devastation caused to Wyoming forests by the Pine Beetle on its head by integrating biomass energy into the State’s overall energy plan.
• Forming a National Environmental Policy Act Team to work with federal agencies to expedite the NEPA process to work more collaboratively with BLM in land use planning and combatting invasive species on public land.
• Identifying and working to reduce areas of duplication in State and Federal regulations.
• In light of coal company bankruptcies and self-bonding the State had permitted earlier, Wyoming must urgently address coal mine reclamation liabilities. The energy strategy accordingly calls for an examination of the adequacy of reclamation formulas, reviewing reclamation goals and definitions, and analyzing the self-bonding program.
• Diversifying the State’s economy by increasing the emphasis on international exports including coal, oil and gas (LNG), uranium and other resources.
• The strategy also addresses rulemaking proposals, including baseline groundwater testing before oil and gas drilling, setback requirements, a review of flaring rules, and mitigation banking and additional efforts for the protection of Greater sage-grouse.

Gov. Mead hopes that this year’s plan will continue to allow the State to be proactive in planning its future energy development, which will in turn create additional economic and business opportunities for both new and existing industries. The Governor asked for $500,000 to implement the energy strategy in the 2017-2018 budget, which was rejected by the Legislature, so it remains to be seen how much of the plan he will be able to implement.

The full text of Wyoming’s Action Plan can be found here: http://governor.wyo.gov/media/news-releases/2016-news-releases/governormeadannouncesupdatedenergystrategy.

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ENERGY TRANSFORMATION: CLEAN POWER PLAN AND THE WEST

When candidate Obama was running in 2008, he identified energy as his top priority and described his goal as the “transformation of American energy” to address the threat of climate change. On August 2, 2015, the President and the EPA Administrator announced the final rule to implement his Clean Power Plan. The focus of the rule is the reduction of carbon emissions from 2005 levels by 32% in 2030.

The rule is issued under the authority of the Clean Air Act Section 111(d) in what many acknowledge is a big stretch for language that was drafted long before climate change was an issue. The rule came as the result of a 2012 settlement of litigation brought by environmental groups and several northeastern states against EPA. See a just-released Senate Majority Staff, Environment and Public Works Committee Report, “Obama’s Carbon Mandate: An Account of Collusion, Cutting Corners, and Costing Americans Billons” on this “sue and settle” tactic. http://goo.gl/gLaviN

The rule addresses new and existing power plants and establishes a different carbon target reduction from a 2012 baseline for each state. According to EPA, each state has the flexibility to choose how it meets its own carbon targets, but the rule is built on three EPA “building blocks”:
• Make fossil fuel power plants more efficient
• Increase generation form lower-emitting combined cycle natural gas plants for reduced generation from higher emitting coal/gas-fired power plants
• Increase generation from new zero-emitting renewable energy power sources
If a state refuses to develop a plan consistent with the rule, EPA will enforce a federal model plan. The rule encourages states to work together and to develop a “cap and trade” program, similar to a proposal that failed to pass Congress in the President’s first term.

EPA projects compliance costs for the rule of between $$5.1-8.4 billion, with an individual’s energy costs increasing by 3%-1% early in the compliance period, but dropping to a net “savings” in 2030 as a result of reduced energy consumption.

Winners and losers? Obviously coal is the big loser, but surprisingly natural gas also came up short with the Administration backing away from gas as a “bridge fuel” in favor of incentives to support wind and solar generation and demand reduction.

The rule is voluminous – existing power plants are addressed in over 1800 pages, new and modified plants are covered in 900 pages and the EPA model federal plan clocks in at 755 pages. See http://www2.epa.gov/cleanpowerplan/clean-power-plan-existing-power-plants

What does the rule mean for the West? Much to the relief of Alaska (and Hawaii) there is no carbon target for these states, yet. Several western states are already on track to meet their carbon targets by 2030 as the result of state law and/or an energy mix already reliant on renewables: California, Washington, Oregon, Nevada and South Dakota. The biggest loser among the states is North Dakota, which saw its 2030 target quadruple from an initially proposed 10.6% reduction to a 44.9% reduction in the final rule. Democratic North Dakota Senator Heidi Heitkamp described the rule as a “slap in the face.” Wyoming, which supplies 70% of the nation’s coal, saw its target double from the draft rule to a 37-44% reduction in the final rule. Wyoming elected officials uniformly attacked the plan with Wyoming Senator Barasso (R) calling it a “job crushing mandate.” Montana was also hit hard with a doubling of its draft goal to a 41% reduction. Montana’s Democratic Governor Bullock said he was “extremely disappointed” by the change, and Montana’s AFL-CIO, which had planned to attend a rally in support of the rule, withdrew in light of the impact of the changed targets on union jobs.

In Utah, where 80% of its power is coal-fired and its renewable energy is sold out of state, elected officials denounced the plan; Senator Orrin Hatch (R) said the rule is “unjustified and potentially devastating for Utah and the nation.” In Colorado, reaction to the state target of a 28% reduction was divided along party lines, with the Democratic Governor Hickenlooper saying he will work to implement the target while Republican Attorney General Cynthia Coffman is considering joining in litigation to challenge the rule. In New Mexico, Republican Governor Susana Martinez and Democratic Senator Tom Udall were united in their belief that New Mexico was ready to comply with the law. See EPA-prepared charts for good summary of state-by-state impacts. https://goo.gl/4rScB4

Opinion among green groups is divided with Environmental Defense Fund Fred Krupp praising the rule as “historic” and an example of Presidential leadership, while the climate researcher and former NOAA scientist, James Hansen, derided the rule as “practically worthless.” The New York Times, in a front page story this week seemed to be “shocked” (see “Casablanca”) that the coal industry was already planning on how to defeat the rule before the rule was published. http://goo.gl/x0yzd3

There is 100% agreement on one thing -- the Clean Power Plan is headed for the courts as soon as EPA publishes the official version of the rule in the Federal Register expected later this month.

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