Preparing Your Company for a Carbon Constrained Economy: The Regulation of Greenhouse Gas

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Preparing Your Company for a Carbon Constrained
Economy The Regulation of Greenhouse Gas

• CBIA Environmental 2009 Conference

Mark R. Sussman 860.240.6034
msussman_at_murthalaw.com
June 10, 2009
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Climate Change Debate

• Debate has changed from whether human activities
  have caused global warming to how we reverse the
  impacts
• 2007 Intergovernmental Panel on Climate Change
  (IPCC) concluded that
• Most of the observed increase in globally
  averaged temperatures since mid-20th Century is
  very likely due to the observed increase in
  anthropogenic man-made GHGs
• IPCC defines very likely as a 90 to 99 percent
  probability
• Massachusetts v. EPA 2007 Supreme Court
  decision holding that CO2 is an air pollutant
  under the Clean Air Act (CAA)
• Connecticut P.A. 08-98 Connecticut Global Warming
  Solutions Act

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Connecticut GHG Emissions 2001
Courtesy of CT DEP

• 92 of Connecticut GHG emissions from fossil
  fuel combustion

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Energy-Related Connecticut GHG Emissions
Courtesy of CT DEP

• Transportation and electricity generation account
  for more than 60 of CT GHG emissions

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Federal Regulation

• Supreme Court decision in Massachusetts v. EPA
  held
• CO2 and other GHGs are air pollutants under CAA
• Once EPA determines that GHG emissions may
  reasonably be anticipated to endanger public
  health and welfare it must regulate GHGs from
  new vehicles unless EPA provides a justification
  grounded in the CAA for not regulating GHGs
• Remand to EPA to make determinations required by
  CAA

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EPA Proposed Endangerment Finding

• April 2009 EPA issues Proposed Endangerment and
  Cause or Contribute Findings for GHGs for Motor
  Vehicles
• Finds that Six GHGs at unprecedented levels due
  to human activities
• Carbon Dioxide - CO2
  
• Hydrofluorocarbons HFC
• Perfluorocarbons PFC
• Common Characteristics
• Long-lived in atmosphere
• Globally well-mixed
• Directly trap outgoing heat

• Sulfur Hexafluoride SF6
  
• Methane CH4
• Nitrous Oxides N2O

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EPA Proposed Endangerment Finding

• Weight of Evidence is compelling that these GHGs
  are the root cause of observed climate change,
  which endangers public health or welfare
• Emissions of GHGs from Motor Vehicles cause or
  contribute to Climate Change

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Implications of Endangerment Finding

• Other CAA sections use the same endangerment
  language, so a finding under Section 202(a) would
  likely lead to regulation of other sources.
• NAAQS Section 108(a) requires EPA to publish a
  list of air pollutants that cause or contribute
  to air pollution that may reasonably be
  anticipated to endanger public health
• New Source Performance Standards (NSPS) for
  stationary sources that contribute significantly
  to such pollution (section 111)
• Regulation of additional stationary sources under
  PSD program

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Implications of Endangerment Finding (continued)

• Environmental Group Petitions to Regulate are
  pending
• Key source categories include Power Plants,
  Aircraft Emissions, Marine Engines, Off-road
  vehicles
• Once Endangerment Finding Issued, EPA must issue
  regulations for stationary sources that
  significantly contribute to GHGs
• Petitions to pressure EPA to act

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PSD Permitting

• PSD applies to major stationary sources or major
  modifications that emit regulated NSR
  pollutants.
• In re Deseret Power Electric Cooperative EAB
  remanded a PSD permit for a coal-fired electric
  generating plant to reconsider whether EPA was
  required to impose BACT for CO2 emissions.
• Issue whether CO2 is a pollutant subject to
  regulation by virtue of regulatory requirements
  to monitor and report on CO2

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December 18, 2008 EPA Interpretation

• Air Pollutants not subject to regulation until
  EPA adopts a regulation that requires controls on
  that pollutant
• Endangerment finding is not the regulation of a
  pollutant
• Under this interpretation, once EPA adopts motor
  vehicle GHG controls, new major sources and major
  modifications will require PSD permits, and
  possibly Title V permits.
• Interpretation is subject to review by the Obama
  EPA

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PSD and Title V Permit Issue

• CAA triggers PSD Permitting for certain
  categories of sources that emit gt 100 TPY of any
  NSR Regulated Pollutant, and any source emitting
  gt 250 TPY of such pollutant.
• Title V Operating Permits required for major
  sources (defined to include sources with gt 100
  TPY of a regulated pollutant)

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PSD and Title V Permit Issue(continued)

• Very small combustion sources would trigger PSD
  and Title V if GHGs are considered a Regulated
  Pollutant
• Examples Combustion turbines - heat input of
  0.21 MMBtu/hr on natural gas (in the kw range)
  Boilers with 0.19 MMBtu/hr on gas 20 HP Diesel
  Engines all emit gt 100 TPY CO2

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EPA Proposed GHG Reporting Rule

• Congress required EPA to adopt a mandatory GHG
  reporting rule under CAA
• EPA proposed GHG Reporting Rule on April 10, 2009
• Massive Rule gt150 pages in Federal Register
• Recordkeeping proposed to be in place by Jan. 1,
  2010
• Reporting threshold 25,000 metric tons C02e,
  except for some categories (e.g. power plants)
  which must report regardless of size
• Reporting under section 114 of CAA no control
  requirements however, potential compliance and
  enforcement issues.

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Future of Federal Climate Change Regulation

• Clean Air Act regulation
• extremely cumbersome, inefficient, and cannot
  easily control global pollutants
• may lead to imposition of controls on very small
  sources of GHGs
• EPA, the Regulated Community AND most
  environmental groups agree that we need new laws
  tailored to address climate change
• Federal Climate Change legislation being debated
  will impose new controls on GHG emissions and
  likely exempt GHGs from certain CAA requirements

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Connecticut GHG Action Program

• Regional Greenhouse Gas Initiative (RGGI)
• Cap and Trade program for electric generation
  sector
• Sources must purchase CO2 allowances to cover
  total CO2 emissions over three year compliance
  periods
• Allowances auctioned to any qualified buyers
• Revenue generated by allowance sale used for
  energy efficiency, renewable energy and other
  clean energy projects
• PA 08-98 Sets GHG Emission Reduction Goals
• January 2020 10 below 1990 levels
• January 2050 80 below 2001 levels

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Connecticut GHG Emission Goals
Courtesy of CT DEP

• Achieving GHG Goals will be challenging and will
  have a significant effect on virtually every
  sector of the economy.

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An Introduction to Greenhouse Gas Programs
MarketsFor CBIAJune 10, 2009By Andy Kruger,
DirectorCarbon Markets
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• Evolution Markets delivers strategic advisory and
  introductory brokerage services to participants
  in the global environmental and energy commodity
  markets
• Founded in 2000
• Headquarters White Plains, NY
• Offices in New York London San Francisco
  Buenos Aires Beijing India
• Worlds Largest Environmental Brokerage Firm
• More than 80 Professionals Worldwide
• Structured over 65 billion in energy
  environmental transactions
• Merchant Banking Evolution Markets Financial
  Services LLC

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• Evolution covers all core environmental and
  energy markets.

ENERGY MARKETS
ENVIRONMENTAL MARKETS

• Renewable Energy Credits
• GHG Credits Allowances
• SO2 Emissions Allowances
• NOX Emissions Allowances
• Houston/Galveston NOX
• RECLAIM (L.A. NOX SO2)
• Emission Reduction Credits
• Weather Derivatives
• Catastrophic Risk Derivatives

• Green Power Transactions
• Biofuels
• Ethanol
• Biodiesel
• OTC Physical Coal
• OTC Coal Derivatives
• Natural Gas
• Nuclear Fuels

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2000
2001
2002
2003
2004
2007
2005
2006
Top SO2 Allowance Broker Top NOx Allowance
Broker Top EU GHG Allowance Broker Top U.S. GHG
Credit Broker Top U.S. Renewables Broker Top
RECLAIM NOx Allowance Broker Top U.S. Emission
Reduction Credit Broker Top Kyoto Credits
Broker Top Weather Derivatives Broker






Magazine Customer Survey

Carbon Market Awards 2005Best Broker






Best Broker, US Physical Forwards (Coal) Best
Broker, Europe ETS Carbon Credits Best Broker,
U.S. Environmental Products Best Broker, Western
U.S. Nat Gas Short-term Best Broker, Western U.S.
Nat Gas Long-term Best Broker, U.S. Weather Swaps
Brokerage Best Broker, European Weather
Derivatives Brokerage

• House of the Year
• European Emissions (2007)
• Weather / Emissions (2004)

category runner-up
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Evolution Markets Firsts

• Jul. 2002 First SIP NOx Allowance Trade
• Dec 2002 First Trade of Kyoto Allowances
  (green-AAUs)
• Apr 2003 First Brokered EU ETS Trade
• Aug 2003 First Green-e Certified Broker
• Aug 2003 First Connecticut RECs Trade
• Jun 2004 First EU ETS Trades Using the ISDA
  Contract
• Nov 2004 First Large-Scale EUA Transaction (400K
  EUAs)
• Nov 2004 First EUA Trade for settlement in 2008
• Sep 2005 First Brokered EUA Option
• Mar 2006 First Indexed CER Trade
• Mar 2007 First Phase Three (post-2012) EUA
  Trade
• Jun 2007 First RGGI Offset Trade
• Sep 2007 First CER Option
• Feb 2008 First Known OTC Alberta Compliance
  Trade
• Mar 2008 First RGGI Allowance Fixed Price
  Forward Trade

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Regulatory Landscape for GHG Emissions
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• Patchwork regional policies emerging in absence
  of U.S. or Canadian Federal action
• Complex, rapidly changing and more difficult to
  navigate
• Emerging market for pre-compliance offsets
• Regional frameworks developing in
• 10 Northeastern states
• 6 Midwest states
• 11 Western states/Canadian provinces
• U.S. Federal activity picks up under new
  administration
• Obama pledges American leadership on climate
  change
• will start with a federal cap-and-trade system.
• Obama appoints key personnel to the
  Administration for climate change
• Commitment to international negotiations on
  climate change
• Dual approach EPA authority under C.A.A. vs.
  legislation from Congress

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• Draft discussion bill introduced March 31, 2009
  by Chairman Henry A. Waxman of the Energy and
  Commerce Committee and Chairman Edward J. Markey
  of the Energy and Environment Subcommittee .
  Proposes a U.S. cap and trade program and a
  Federal Renewable Portfolio Standard, amongst a
  host of other climate change mitigation policies
• Cap and Trade
• Covered Sources
• Sources emitting more than 25,000 tons per year
  of CO2 equivalent
• Covers roughly 85 of US emissions, including
  utilities, refining, and the industrial sector
• Targets
• 3 below 2005 levels in 2012,
• likely to be negotiated down to 17 below 2005
  levels in 2020,
• 83 below 2005 levels in 2050
• (Represents 4.7 billion tons in 2012 and 1
  billion tons in 2050)

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• OFFSETS
• Allows covered sources to use offsets for
  compliance under the program
• The total quantity of offsets allowed each year
  cannot exceed 2 billion tons, split evenly
  between domestic and international offsets
• Regulated entities must submit five offsets for
  every four tons of carbon or a 1.25 ratio.
• Eligible offset types will be determined by an
  EPA Advisory Board, but the bill defines
  additionality under the program as a.)
  activities not required under existing
  regulations b.) projects starting after January
  01, 2009 or project started after January 01,
  2001 and issued credits by a voluntary carbon
  offset program and c.) not exceeding project
  type baselines established by the EPA.
• The bill allows for import of international
  credits, including sectorial reductions. CDM
  credits can be imported only after a finding by
  the EPA that the program meets standards for
  integrity.

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• Program features
• January 1, 2009 start date
• Regional Cap of 188M tons (roughly 2005
  emissions)
• CO2 only, 25MW generators only
• Emissions stabilize from 2009-2014
• 2.5 reduction/yr 2015-2018
• (35 below Business as Usual by 2020)
• Price triggers
• First auction clears 3.07, 12,565,387
  allowances
• Second auction December 17 31,505,898 allowances
• Price floor 1.86/allowance in auction
• December 2009 contract ADV 161k allowances, since
  September Auction
• Outstanding questions
• Few facilities covered
• Limited offset types
• Price triggers cause cost uncertainty
• Total supply of RGGI allowances may exceed demand

Participants Connecticut DelawareMaine Maryland M
assachusetts New Hampshire New Jersey New
York Rhode Island Vermont Observers Pennsylvania
Florida Northeastern Canadian Territories
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• CCFE volume has been very sporadic averaging less
  than 10 contracts per day
• Open interest in the DEC09 contract is currently
  31 contracts

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Observed Prices
Standard
Standard Properties
Gold Standard

• Renewable energy and energy efficiency projects
• Focus on social and environmental side benefits

8 to 12
VER

• Created by verifier TUV-SUD

2 to 7
CCAR

• Landfill, livestock, and forestry protocols
• Informing CARB - AB32 regulations

5 to 9
CDM VER

• VERs from a pre-registration CDM project

4 to 9
Voluntary Carbon Standard (VCS 2007)

• Created with wide industry input

3 to 7
CCX

• Relaxed additionality requirements
• Project info not available to buyers

1.05

• No accepted protocol used
• However range of quality can be dramatic

No Standard
0.50 to 8
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Contact Andy Kruger Director, Carbon
Markets Evolution Markets Inc. 10 Bank Street,
Suite 410White Plains, NY 10606 tel. 1
914.323.0265 fax [phone] akruger_at_evomarket
s.com
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Five Essential Elements of a World Class Energy
Management Program Michael Conway UTC Energy
Commodity Manager
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UNITED TECHNOLOGIES58.7B Revenues Seven
Business Units
Heating, ventilating, cooling refrigeration
systems
Clean power, cooling / heating solutions
Aircraft engines, gas turbines space propulsion
systems
Helicopters
Industrial aerospace systems
Security fire protection services
Elevators, escalators, moving walkways, people
movers horizontal transportation systems
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UNITED TECHNOLOGIESBusiness in
balance markets, customers and geographies
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Global GHG Management, where do I start?
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GLOBAL GHG REDUCTION PLANFive essential elements

• UTC has developed a world class energy management
  program that works for our organization,
• Environmental data management system
• Established corporate policy and goals
• Developed an in-house cross-divisional Energy
  Team (audits, provide training, build awareness)
• Developed an Energy Management Guidebook
• Use an online project tracking system

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Step 1
DATA MANAGEMENTGreenhouse gas protocol WRI-WBCSD

• Carbon Dioxide (CO2) Methane (CH4), Nitrous
  Oxide (N20), Hydrofluorocarbons (HFCs),
  Perfluorocarbons (PFCs), and Sulphur Hexafluoride
  (SF6)

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Step 1
UTC GREENHOUSE GAS FOOTPRINTAlignment with
WRI/WBCSD GHG Protocol
Total Global GHG Footprint
FACTORY EMISSIONS (Scope 1 direct )
PURCHASED ELECTRICITY (Scope 2 indirect )
OTHER EMISSIONS (Scope 3 indirect )

• Current
• Fuel used on site (boilers, testing, etc.) at
  operations with gt100K threshold
• Fleet (incl. UT Flight)

• Current
• Purchased electricity at operations with gt100K
  threshold
• Current data, plus
• Estimated office warehouse energy
• Specific regional conversion factors

• Current
• Business travel (commercial air and car
  rental)
• Current data, plus
• Executive fleet personal miles

1997-2006 10X Goal reporting1

• Current data, plus
• Direct emissions of CO2, HFC, N2O, PFC, SF6, CH4
  2 (zero threshold for reporting)

2007-2010 Goal Reporting

• Not measured
• personal vehicle business miles
• Products in service
• Suppliers

• Measured Reported to UTC
• The six main greenhouse gases include carbon
  dioxide (CO2), methane (CH4), nitrous oxide
  (N2O), hydrofluorocarbons (HFCs),
  perfluorocarbons (PFCs), and sulphur hexafluoride
  (SF6).

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Step 1
DATA MANAGEMENTWeb based environmental data
collection
Direct process emissions
Energy, business travel fleet
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CORPORATE POLICY AND GOALSSenior management
support
Step 2

• Sustainability is doing things efficiently to
  preserve resources and minimize environmental
  impacts.
• UTC is absolutely committed to sustainability.
  Five themes are essential for us
  including
• energy efficiency of our products in service
• environment, health and safety impacts in our own
  operations and our suppliers as we move forward.
• productivity in its conventional sense (more
  broadly doing more with less)
• opportunities for employees to develop
  themselves and
• legal compliance and high ethical standards.

George DavidChairman United Technologies
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Step 2
ENERGY and GHG REDUCTION PLAN
EHS Standard Practice SP-017
SP-017 outlines the elements necessary to manage
energy and reduce GHG emissions. This standard
applies to all UTC business units
worldwide. The minimum expectation is that
each site has a documented plan that demonstrates
identification, assessment, control, an
actionable implementation plan and completed
project list.
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ENVIRONMENT, HEALTH SAFETY 2010 EHS Goals
Step 2
Supplier Metrics
Factory Operations Metrics all absolute
(non-normalized) reductions
Critical Suppliers
100
meet UTC EHSexpectations
Assurance Review Score
70
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GREENHOUSE GASESCarbon dioxide equivalents
(CO2e)
Step 2
2007-2010 -3 per year
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GHG Mgt. TRAINING AND AUDITS
Step 3
Training over 200 employees worldwide 2006
Energy Workshops held in Charlotte and Paris
2007 Energy Workshops held in Atlantic City,
Villasanta (Italy), and Singapore Audits of Top
60 sites worldwide
Financially sound investment and CO2 reductions
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Step 3
GHG REDUCTION STRATEGYIdentify footprint
segments and drivers
Tactics Conservation projects and equipment
upgrades Energy and GHG reductions lower
operating costs



Larger sites ? ?
smaller sites
Cogen
On-site renewables (solar, wind)
High efficiency equipment
Green power purchases
Fleet efficiency
Shut-it-off
Actions Standard Practice 17 (SP-017) Energy
Management Guidebook Workshops audits and
standard work Executive CRR briefing kits EHS
brochure
Enablers Engagement of multiple functions Tools
development Training and Education Communications
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UTC Energy Team - Tools
Step 4
ENERGY MANAGEMENT GUIDEBOOK

• Energy Team Guidebook
• Energy Management Handbook
• Sullair Compressed Air Guidelines
• UTC Lighting Guidelines
• Workshops
• Audits
• Self Assessment Tools
• Standard Work Documents
• Steam Trap Maintenance
• Shut it Off
• Compressed Air Leak Management
• Rate Management

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PROJECT TRACKING
Step 5
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Step 5
HS CHILLER REPLACEMENT
Original Chiller
Replacement
800 ton, energy efficient Carrier, w/VFD
1100 ton, 1967 vintage Carrier unit
Consumption 2,000,000 KWH Emission 1128 MT CO2e
Consumption 800,000 KWH Emission 451 MT CO2e
Energy and GHG Reductions 1,200,000 KWH 677
Metric Tons CO2e 3 year payback
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PW LIGHTING PROJECT Light levels Up Costs Down
Step 5
Typical Lighting Fixtures

• Lighting projects approved for 2 PW facilities
• GHG reduction 9,000 metric tons (12)
• Buildings L, J, K in EH, Building 150, 220
  and 220M in Middletown

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Step 5
OTIS MADRID - SOLAR PROJECT
3,600 pv panels, 738 Kw peak power Estimated
production 1,000 Mwh/year Representing 60 of
site electricity requirements, 1,000 metric ton
CO2e reduction
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PW MIDDLETOWN COMBINED HEAT POWER
Step 5

• 7.5MW unit
• (2) new boilers
• Dual fuel gas/oil
• Steam uses
• cooling in summer
• heating in winter

• Cogeneration plant is operational
• Official dedication Earth Week 4/25/08
• GHG reduction - 12,000 metric tons (12)
• Plant savings and cost avoidances - 3.0M per
  year

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Step 5
SIKORSKY TEST STAND
Original Proposal
Implementation
Regenerative Test Stand
Standard Test Stand
Consumption 659,464 KWH 1.56M gallons of
water Emission 294 Metric Tonnes
Consumption 118,708 KWH 0 gallons of
water Emission 53 Metric Tonnes
Water and Energy Saved 540,760 KWH 1.56 M gallons
of water 241 Metric Ton CO2e 3.2 year payback
Qualifies for Utility Company Incentive

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LEED PROJECT STATUS
UTC standard for new construction LEED Certified
Gold target
Completed projects PW G Bldg. Renovation LEED
Silver (50K ft2) Otis TEDA Target LEED Gold
(1.5 million ft2)
18 projects underway total 1 million
ft2 Primarily in Europe and Asia
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FIVE ESSENTIAL ELEMENTS of GHG PROGRAM
Summary, must do all five

• Environmental data management system
• Established corporate policy and goals
• Developed an in-house cross-divisional Energy
  Team (audits, provide training, build awareness)
• Developed an Energy Management Guidebook
• Use an online project tracking system

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QA