May Provinces (or States) Limit Imports on the Basis of Greenhouse Gas Emissions Elsewhere?

By James ColemanMartin Olszynski

Screen Shot 2015-04-15 at 9.03.54 AMLast week, a group of economists known as “Canada’s Ecofiscal Commission” issued a much-discussed report that urged Canada’s individual provinces to drive Canadian climate policy by adopting their own carbon pricing schemes. But the report barely touched on one of the key challenges for provincial or state regulation without the support of the national government: what may places that price carbon do to avoid losing industry to places that don’t?

This is an urgent question across North America because, for different reasons, Canada and the United States are unlikely to adopt uniform nationwide climate policies in the near future.[1] Instead, climate regulation will be somewhat different in each state and province. But states and provinces lack a key power that national governments use when they adopt climate regulation: the power to adopt trade regulations that control imports. The nation is an economic union so provinces can’t limit trade across their borders.

Climate and trade policies often go hand-in-hand because nations that limit carbon emissions worry they will lose industry to nations that do not. After all, if emissions merely shift to other nations, a phenomenon known as “carbon leakage”, a single nation’s carbon policies won’t do much to help the global climate. One way around this problem is to charge a “carbon tariff” on imports that were produced in nations that do not have similar limits on carbon emissions. This charge is calculated by estimating how much carbon was emitted to produce the imported product and then multiplying that quantity by the importing country’s carbon price. These tariffs are sometimes called “border adjustments” because, in theory, they are supposed to level the playing field between domestically regulated producers and unregulated foreign ones.

You can’t set up a customs house between Manitoba and Ontario, so provinces can’t charge a regular carbon tariff. But states and provinces have found a roundabout way to do more-or-less the same thing. For instance, California and Quebec both have cap-and-trade systems that force power plants to purchase a permit for each ton of carbon that they emit into the atmosphere. Crucially, these cap-and-trade systems also apply to power plants in other states that export electricity to California and Quebec. The effect is the same as the customs house: when a purchaser imports electricity into California or Quebec it must pay a charge for all the carbon that was emitted elsewhere to produce that electricity.

So can states and provinces place a charge on imports that accounts for how much carbon was emitted elsewhere to produce them? It’s a crucial question because such charges could apply to all kinds of goods, not just to electricity. Provinces like British Columbia and states like California are already setting standards for motor fuels that effectively charge imported fuels for the greenhouse gases that were emitted elsewhere in their production. And in theory the same charges could apply to any kind of good. You would just add a surcharge to every item based on the greenhouse gases that were emitted elsewhere to produce it: television sets, fruit, toys, you name it.

In fact, state and provincial climate regulations across North America are increasingly adopting exactly these kind of controls, adding urgency to the underlying legal question: may energy importers export their regulation to cover emissions outside their borders? In the absence of national action on climate change, provinces are looking for creative ways to make sure that they don’t lose industry to provinces that don’t regulate, so they’re regulating imports based on carbon emissions elsewhere.

Canada’s Ecofiscal Commission is recommending provincial action on climate but it has little to say on this crucial topic, and what it says is confusing. The report’s section on “competitiveness” has a subheading titled “Border adjustments could level the playing field,” which sounds promising. It then says “border adjustments could not be implemented by a single province, but would require involvement by the federal government,” which is a major qualification. But then it states that, after all, such adjustments are possible for “specific emissions that fall under provincial jurisdiction” and cites the example of Quebec’s electricity imports. For this proposition it cites a white paper on a U.S. cap-and-trade system written by U.S. law students.

This issue is too important to gloss over. If states and provinces are going to lead the fight against climate change, many legal decisions and many academic pieces will be written on the topic before it is resolved. This post merely flags some of the key rules and arguments that will be in play.

The normal rule has been that states and provinces may not adopt regulations for pollution emitted in other states. These forbidden rules are known as “extraterritorial” regulations. In Interprovincial Co-Operatives Ltd. v. Dryden Chemicals Ltd, the Supreme Court of Canada held that Manitoba could not make a law punishing companies that lawfully emitted pollutants in Saskatchewan and Ontario, even if those pollutants made their way into Manitoba. The rule in the United States is more complicated, but under what is known as the “dormant commerce clause”, the U.S. Supreme Court has held that states cannot adopt a law “if the practical effect of the regulation is to control conduct beyond the boundaries of the State.”

One important reason for the normal rule is that if provinces or states began banning products that were produced elsewhere in ways that they didn’t like, they would quickly run afoul of international trade laws. For example, if Ontario banned all products made by laborers that were not paid its $11 per hour minimum wage that would, as a practical matter, end imports from the developing world. It would also conflict with the General Agreements on Tariff and Trade that govern international trade.

On the other hand, the traditional rule against extraterritorial regulation is on somewhat tenuous footing. In Canada, Interprovincial Co-Operatives involved a 3-1-3 split, which makes the primary ruling open to debate. The decision is also four decades old and has been heavily criticized, including by one of Canada’s leading constitutional scholars. See Peter Hogg, Constitutional Law of Canada, 5th ed., (2007) at 13-10. Similarly, in the United States, scholars and judges have suggested that limits on extraterritorial regulation should be abandoned.

Suffice it to say that import regulations may have a better chance of being upheld where their extra-provincial effects are deemed incidental to their primary purpose, or “pith and substance” in Canadian jurisprudential terms. Reference re Upper Churchill Water Rights Reversion Act, [1984] 1 SCR 297. See also Shi-Ling Hsu and Robin Elliot, “Regulating Greenhouse Gases in Canada: Constitutional and Policy Dimensions” (2009) 54 McGill L.J. 463.

And perhaps the normal rule should bend in the case of provincial climate regulation. For one thing, even if carbon emissions occur in Alberta, they still affect the global climate, which could harm Ontario, Quebec, and every other place in the world. For the same reason, it is vital that climate regulation doesn’t just shift carbon emissions to other provinces: few will want to regulate if the provinces that do lose jobs without securing any net benefit for the climate. If we want provinces to set a model for eventual national regulations, maybe they need the same trade powers.

States and provinces also have long-standing authority to manage the mix of sources providing power to their electrical grid, which includes regulating contracts for electricity imports. This helps to ensure that power will always be available at reasonable prices. But there are limits to this authority as well: a province certainly could not prescribe the wages or working conditions for employees at power plants in other provinces. Can provinces prescribe carbon standards for power plants elsewhere under their traditional authority over electricity markets? That remains an open question.

So far, the U.S. courts are divided on whether states may regulate based on carbon emissions elsewhere. An appellate court said that California could regulate fuels based on emissions elsewhere and a district court said that Minnesota could not regulate electricity based on emissions elsewhere. The Canadian courts have not yet addressed the question. And the first two Canadian cap-and-trade systems are poor test cases because both Quebec and Ontario import far less electricity than they export. But the question will become unavoidable as more provinces adopt the kind of policies recommended in the Ecofiscal Commission’s report.

Finally, these questions will grow more pressing as long as national governments delay action to address climate change. As with recent provincial efforts to improve environmental impact assessments of interprovincial pipelines, the federal policy vacuum is pushing provinces to act on their own. In the United States, one interim solution could be for the federal government to allow non-discriminatory state regulation of energy imports. If Canada’s government is serious about sticking with provincial climate policy, it may have to consider similarly creative solutions. In the meantime, these policies will continue to present difficult and novel legal questions about the boundaries of state and provincial authority.

__________________________

[1] In Canada, the conservative government has repeatedly delayed federal climate regulations and the leader of the liberal party has pledged to leave the provinces in charge of carbon pricing. In the United States, congressional inaction has pushed President Obama to rely on a rarely-used Clean Air Act provision that requires states to adopt their own regulations for power plant carbon emissions.

Conference Announcement: “Integrity of Creation: Climate Change”

I hope you’re enjoying the newly redesigned Energy Law Prof blog, which is now located at http://www.energylawprof.com/.

If you are announcing a conference in energy/climate/environmental law or policy, please just send me a post in the format below and I’ll be happy to post it. Here’s the example that I’ve been asked to post today:

 

Christine Skrzat of the Center for Healthcare Ethics at Duquesne University asks me to pass on the following conference announcement:

Screen Shot 2015-04-03 at 3.13.55 PMConference, Integrity of Creation: Climate Change

Duquesne University, Pittsburgh, PA

September 30 to October 2, 2015

Duquesne University invites academic Papers & Posters on Climate Change to be presented at this inaugural annual conference. The interdisciplinary conference series provides a scholarly forum to explore topics related to the Integrity of Creation. The deadline for applications is Friday May 15, 2015. There is no fee to register for the conference. For questions contact Glory Smith, at: smithg@duq.edu or 412-396-4504. Please apply on the conference website at: www.duq.edu/ioc

 

 

 

Do Corporations Cry Wolf? — Comparing What Companies Tell Regulators With What They Tell Investors

6721834473_83e3b6cb95Corporations regularly complain that new regulations will harm their business and the broader economy. How seriously should we take those warnings? I’ve just posted a paper that presents a way of answering this perennial question.

It’s often said that corporations, “Cry Wolf,” falsely predicting that rules will be very costly. A prime example comes from 1970 when Ford’s President, Lee Iacocca warned that the Clean Air Act “could prevent continued production of automobiles” and was “a threat to the entire American economy and to every person in America.” So when industry says that new regulations such as the Environmental Protection Agency (EPA) Clean Power Plan will be unworkable, many suggest that regulators should just ignore those warnings.

But the problem with crying wolf is that there are wolves. That is, false alarms are dangerous because they mean we won’t respond to true threats. And from time to time, regulations really are unworkable, and industry might be the first to recognize this, which is why regulators don’t just ignore industry warnings.

So regulators face a dilemma: they need industry to tell them whether a rule is workable, but they suspect industry will exaggerate the cost of regulation. How can regulators tell how much companies really expect rules to cost?

My paper, titled “How Cheap is Corporate Talk?” compares companies’ comments on proposed rules with what the same companies told their investors about the same proposals. After all, companies have no reason to trick their investors into thinking that a rule might harm the company. In fact, they may want to reassure investors by minimizing the danger from proposed rules. So if regulators want to know how much a company worries about a proposed rule, they should compare the company’s comments on the rule with what it told its investors.

Take Lee Iacocca’s famous warning that the Clean Air Act could “prevent continued production” of cars in America. In its annual report for that year, 1970, Ford told its investors that “the automobile industry has survived and grown even in countries where government policies have made the cost of car ownership several times higher than it is in the United States” and assured them it had “no doubt that our industry will continue to grow.” Who signed that prediction on behalf of Ford’s board of directors? Henry Ford II and . . . Lee Iacocca.

This paper focuses on a contemporary example of the regulator’s dilemma: the EPA’s Renewable Fuel Standard. The Standard requires oil companies to blend ethanol into the fuel they sell, and it requires more ethanol each year. EPA proposes and sets a required percentage of ethanol annually, which gives oil companies plenty of opportunities to comment. The paper matches those comments up with contemporary Form 10-K securities disclosures from the same companies.

The study finds that oil companies made significantly more predictions about how the Renewable Fuel Standard would harm them in comments than they disclosed in their 10-K statements. For example, one oil company told the EPA that if the rules weren’t changed, they would “limit the supply of gasoline and diesel fuel” and cause “severe economic harm.” In its securities disclosure, the only thing its parent company told its investors was that rules like the Renewable Fuel Standard were creating a strong market for biofuels. And it even implied that that was a good thing because of its side business as a biofuel producer.

Regulators should ask public companies to attach relevant excerpts from their securities disclosures to their comments on proposed rules. This would help regulators assess when a proposed rule might present a true threat to an industry or the economy. In the meantime, securities regulators should scrutinize company comments to find regulatory risks that companies may be concealing in their disclosures to investors. By comparing what companies tell their regulators with what they tell their investors, we’ll all know whether to come running when a corporation cries, “Wolf!”

Legal Debate on EPA’s Power Plan Takes Center Stage

Screen Shot 2015-03-30 at 4.26.49 PMFor the past two weeks, the U.S. Environmental Protection Agency’s “Clean Power Plan” for power sector carbon emissions has been the center of an ongoing debate between some of the nation’s foremost constitutional and environmental law scholars.

As described in previous posts, the Clean Power Plan aims to place caps on greenhouse gas emissions (or emissions intensity) from each of the 50 states in the U.S. To comply, states will have to use their coal plants less, increase their use of natural gas and renewable fuels, and improve their energy efficiency. A state can focus its effort more or less on each of these methods, so long as it meets its target.

In two earlier posts, I explained the Clean Power Plan, noting that it would attract legal arguments that the Environmental Protection Agency (EPA) has overstepped its legal authority, and explained how the Supreme Court’s decision in Utility Air Regulatory Group v. EPA would bolster these arguments.

Those arguments are now in full swing. Here is the back-and-forth between Professor Larry Tribe, one of the nation’s most prominent constitutional law scholars, and Professors Jody Freeman and Richard Lazarus, two of the nation’s most prominent environmental law professors. These arguments are framed as a disagreement over the constitutionality of the Clean Power Plan, but many of the arguments are really about whether EPA has the statutory authority that it claimed in the Plan.

On March 17, Harvard Law School Prof. Larry Tribe testified to the House Committee on Energy and Commerce’s Subcommittee on Energy and Power arguing that the Clean Power Plan is unconstitutional.

On March 18, Harvard Law School professors Jody Freeman and Richard Lazarus strongly disagreed, responding in an op-ed published at Harvard Law Today, titled “Is the President’s Climate Plan Unconstitutional?

This started a significant back and forth that included:

You may also want to check out:

  • The testimony of Prof. Richard Revesz, another of the country’s foremost experts on environmental law and federalism, who testified at the same March 17 hearing in favor of the Clean Power Plan.

These arguments are just the opening skirmish in a running legal battle. If the Obama administration (and the administration that follows it) stays the course on the Clean Power Plan, the arguments will finally be resolved in court.

 

Conference Announcement: Sustainability Conference of American Legal Educators, May 8, Tempe, Arizona

Troy Rule, Faculty Director of the Program on Law and Sustainability at Arizona State University’s Sandra Day O’Connor College of Law asks me to pass on the following conference announcement:

Screen Shot 2014-12-24 at 12.11.56 PMThe Law and Sustainability Program at the Sandra Day O’Connor College of Law is pleased to announce its First Annual Sustainability Conference of American Legal Educators (SCALE) Conference to be held on May 8, 2015 at the Sandra Day O’Connor College of Law in Armstrong Hall on the Arizona State University Campus in Tempe, Arizona.

This new conference will be an annual, national event for legal academics researching in sustainability-related areas. The conference will offer a unique forum for panels and presentations falling within one or more broad subject matter areas pertaining to sustainability, including but not limited to:

  • Climate Change Law
  • Energy Law
  • Water Law
  • Environmental Law
  • Natural Resources Law
  • Land Use and Zoning Law
  • Agricultural and Food Law
  • Disaster Law

The conference’s inaugural keynote speaker will be Professor Daniel Esty, Director of the Yale Center for Environmental Law & Policy at Yale Law School.

Presenters who are interested will also have an opportunity to join in an organized hike of a nearby mountain on the morning of Saturday, May 9, 2015.

For information on how to submit panel or presentation proposals, please click here.

TransCanada’s Other Pipeline Problem: Can Provinces Impose Conditions on Energy East?

  • Guest blogger Martin Olszynski is back to discuss Ontario and Quebec’s recent pushback against TransCanada’s Energy East project, a proposed pipeline that would carry over one million barrels a day of oil from Alberta to Canada’s east coast. In the U.S., states generally have authority to approve pipelines, but in Canada the federal government has authority over interprovincial pipelines, so Prof. Olszynski considers to what extent provinces like Ontario and Quebec may influence a pipeline that will pass through their territory. This is a crucial issue because as TransCanada keeps waiting for U.S. approval of its Keystone XL project, companies are pursuing other pipeline projects designed to take crude oil to the west coast through British Columbia, or to the east coast through Quebec and Ontario. As Prof. Olszynski discusses, those provinces are pushing back.

By Martin Olszynski

On November 18th, on the heels of a unanimous vote of non-confidence by Quebec’s legislature in Canada’s national energy regulator (the National Energy Board or NEB), that province’s Environment Minister sent a letter to TransCanada (the company behind Keystone XL) outlining seven conditions that the company must meet before the province accepts the Quebec portion of the company’s proposed Energy East pipeline.

Most of the conditions are similar to those stipulated by British Columbia with respect to Enbridge’s Northern Gateway pipeline (e.g. world class emergency and spill response plans, adequate consultation with First Nations) with three notable differences. First, while Quebec insists that the project generate economic benefits for all Quebecers, unlike British Columbia it is not asking for its “fair share” (whatever that meant). Second, because Energy East involves the repurposing of an existing natural gas pipeline, Quebec insists that there be no impact on its natural gas supply. Finally, and the focus of this post, Quebec insists on a full environmental assessment of the Quebec portion of the pipeline and the upstream greenhouse gas emissions from production outside the province – essentially the analysis conducted on Keystone XL and something that the NEB has consistently refused to assess in its other pipeline reviews. The following week, Ontario joined Quebec in imposing these conditions (see here for the MOU between those two provinces). Premier Kathleen Wynne acknowledged that “Alberta needs to move its resources across the country,” but that two provinces “have to protect people in Ontario and Quebec.”

In this post, I consider whether this state of affairs is consistent with the current approach to the regulation of interprovincial pipelines in Canada. Readers should note, however, that following a visit from the Premier of Alberta, the Premiers of Ontario and Quebec have since backpedalled and are no longer demanding an assessment of the pipeline’s upstream greenhouse gas emissions (as was carried out with respect to Keytsone XL), although they are still insisting on their own environmental assessment.

Not All Conditions Are Created Equal

As noted by my University of Calgary Faculty of Law colleague Professor Nigel Bankes in the context of the Northern Gateway pipeline, the “general proposition is that a province will not be permitted to use its legislative authority or even its proprietary authority…to frustrate a work or undertaking which federal authorities…consider to be in the national interest.” The question thus becomes what kind of conditions might amount to frustration? Fortunately, we have a recent decision of the NEB, in the context of Kinder Morgan’s equally contentious Trans Mountain pipeline application, which sheds some useful light on this issue.

Briefly, Kinder Morgan has applied to the NEB for a certificate of public convenience and necessity (section 52 of the National Energy Board Act RSC 1985 c. N-7) for the expansion of an existing pipeline from Alberta to British Columbia. This past summer, the company indicated that its preferred corridor had been revised and that its preferred routing was now through Burnaby Mountain, which is located in the municipality of Burnaby, British Columbia, and which happens to be a conservation area. Consequently, the NEB determined that additional geotechnical, engineering and environmental studies needed to be completed before it could make its section 52 determination. Although section 73 of the NEB Act gave the company the power of entry required to carry out these studies, Kinder Morgan sought Burnaby’s consent to enter upon the relevant lands to do the work, which included borehole drilling and some site preparation (e.g. the removal of some trees and brush). Burnaby refused to give its consent. In fact, its mayor has long staked out a position of opposition to the pipeline.

After a month of failed correspondence, Kinder Morgan began its work on Burnaby Mountain. Several days into that work, its employees were issued an Order to Cease Bylaw Contravention and a bylaw notice for violations of the Burnaby Parks Regulation Byalw 1979 (Parks Bylaw, which prohibits damage to parks) and the Burnaby Street and Traffic Bylaw 1961 (Traffic Bylaw, which amongst other things prohibits excavation work without consent). Subsequently, Kinder Morgan filed a motion, including a notice of constitutional question, seeking an order from the NEB directing the City of Burnaby to permit temporary access to the required lands.

The NEB granted the order, on both “paramountcy” and “interjurisdictional immunity” grounds. Briefly, federal paramountcy is a Canadian constitutional doctrine that sets out the circumstances when a provincial or municipal law will be rendered inoperative in the face of a conflicting federal law. After summarizing the relevant jurisprudence (at p 11), the NEB concluded that there was a “clear conflict” between the Parks Bylaw and Traffic Bylaw on the one hand, and paragraph 73(a) of the NEB Act on the other. With respect to the Parks Bylaw, for example:

…Section 5 [contains] a clear prohibition against cutting any tree, clearing vegetation or boring into the ground, regardless of whether minimal tree clearing is necessary where the trees would create a safety risk for the drilling work that must occur. While the Board accepts that the Parks Bylaw has an environmental purpose, the application of the bylaws and the presence of Burnaby employees in the work safety zone had the effect of frustrating the federal purpose of the NEB Act to obtain necessary information for the Board to make a recommendation under section 52… (at p 12)

The NEB made the same finding with respect to the Traffic Bylaw: dual compliance was impossible, such that the doctrine of paramountcy applied and the bylaws were inoperable to the extent that they prevented Kinder Morgan from carrying out the necessary work. The NEB made clear, however, that this did not mean that “a pipeline company can generally ignore provincial law or municipal bylaws. The opposite is true. Federally regulated pipelines are required, through operation of law and the imposition of conditions by the Board, to comply with a broad range of provincial laws and municipal bylaws” (at p 13).

With respect to interjurisdictional immunity (IJI), which the NEB considered in the alternative, after acknowledging that its usage “has fallen out of favor to some degree,” the NEB observed that “it is still an accepted doctrine for dealing with clashes between validly-enacted provincial and federal laws” (at p 13). The effect of the doctrine is to “read down” valid provincial laws where their application would have the effect of impairing a core competence of Parliament or a vital part of a federal undertaking. Impairment is key: provincial laws may affect a core competence of Parliament or a federal undertaking (to varying degrees), but this is not sufficient. Applying this test to the facts before it,

The Board finds that the Impugned Bylaws impair a core competence of Parliament… the routing of the interprovincial pipeline is within the core of a federal power over interprovincial pipelines. Actions taken by Burnaby with respect to enforcing the Impugned Bylaws impair the ability of the Board to consider the Project and make a recommendation regarding on the appropriate routing of the Project. The Board requires detailed information from surveys and examinations in order to make a recommendation to Governor in Council and to complete an environmental assessment. Similar to the location of aerodromes being essential to the federal government’s power over aeronautics, detailed technical information about pipeline routing is essential to the Board.

Thus, when considering Quebec’s (and Ontario’s) conditions, the following principles ought to be kept in mind. Generally speaking, provincial laws apply to federal undertakings such as pipelines. Such laws will only be vulnerable to the extent that they conflict with or frustrate the purpose of the NEB Act (federal paramountcy), or impair a core competence of Parliament of vital part of the federal undertaking (IJI). Another point worth keeping in mind is specific to environmental laws. In both Canada and the United States, environmental laws are primarily procedural, not substantive, in nature. At their core they merely confer decision-making authority (e.g. to authorize activity that would otherwise be a contravention of the law), although they do seek to improve that decision-making by imposing certain “guideposts,” such as conducting environmental assessment (see A. Dan Tarlock, “Is There a There There in Environmental Law?” (2004) 19 J Land Use & Envtl L 213). This suggests that it will be very difficult, if not impossible, to conclude whether environmental laws frustrate a federal law or impair a federal undertaking until an actual decision has been made.

Condition 2: Comprehensive EA including Upstream Greenhouse Gas Emissions

In its letter to TransCanada, Quebec states that an EA of the Quebec portion of the pipeline is required pursuant to para 2(j) of the Regulation respecting environmental impact assessment and review, ch. Q-2, r. 23 (“the construction…of more than 2 km of oil pipeline in a new right-of-way”). Seemingly unsure of itself, however, it also suggests that it is in TransCanada’s “interest to respect the will of Quebecers” (my translation) – not that it must. The desired result was a comprehensive assessment of those portions of the project situated in Quebec, which until last week included a marine terminal and storage facility at Cacouna, before Quebec’s EA agency, le Bureau d’audiences publiques sur l’environnement (BAPE). As of last week, however, TransCanada announced that the marine terminal plans are on hold in light of the continuing deterioration of the St. Lawrence Beluga whale population, presumably leaving just the pipeline to be assessed for the time being.

The results of this assessment will “serve to inform Quebec’s decision and in this way its position before the NEB” (my translation). The letter does not state which “decision” it is referring to, but the answer would seem to lie in sections 31.1 and 31.5 of Quebec’s Environmental Quality Act CQLR c Q-2:

31.1. No person may undertake any construction, work, activity or operation…in the cases provided for by regulation of the Government without following the environmental impact assessment and review procedure and obtaining an authorization certificate from the Government.

31.5. Where the environmental impact assessment statement is considered satisfactory by the Minister, it is submitted together with the application for authorization to the Government. The latter may issue or refuse a certificate of authorization for the realization of the project with or without amendments, and on such conditions as it may determine…

Viewed this way, it does not seem unreasonable to suggest that “Quebec’s government has had enough and has taken control of the process in the province,” and that “the proceedings before the [NEB], replete with 30,000 pages of unilingual English text, are now very secondary.” Does such a situation conflict with, or frustrate the purposes of, the NEB Act?

I don’t think it does. Environmental assessment has long been understood in Canada as “simply descriptive of a process of decision-making” (Friends of the Oldman River Society v. Canada (Minister of Transport [1992] 1 S.C.R. 3). There is no conflict between the requirements of the NEB Act and the CEQ; Trans Canada can comply with both. Doing so may seem duplicative but that is a matter of policy, not constitutional imperative. And even as a matter of policy this argument is weak in light of recent changes to the federal environmental assessment regime (including restrictive standing rules and a restricted definition of environmental effects) and the decision by the NEB to exclude upstream greenhouse gas emissions from its own review.

Nor does such a condition impair a core competence of Parliament or a vital part of a federal undertaking, for as old as is the understanding of environmental assessment as process so too is the recognition that jurisdiction with respect to the environment is shared between the federal and provincial governments. And while not determinative, it’s worth noting that the current chair of the NEB would seem to agree that there is room for both levels of government here, having recently suggested that the NEB’s primary environmental concern is to ensure the proper construction and operation of pipelines, and that it is up to the provinces and the company to look after broader issues around climate change.

That being said, what Quebec can actually do with the results of its environmental assessment is another matter entirely. The short answer is probably not very much. It might be able to secure some modifications to the project (e.g. that certain standards or ‘best practices’ be applied during construction and operation), but if the NEB makes a positive recommendation to the federal Cabinet then outright refusal of a certificate of authorization would seem off the table (or would be rendered inapplicable). One might reasonably then ask: why go through all the trouble in the first place? The answer is rooted in the procedural nature of environmental law referred to above. With respect to environmental assessment specifically, while the process is certainly intended to improve governmental decision-making, it is also intended to enable political accountability through the full disclosure of the tradeoffs being made (see e.g. Bradley C. Karkkainen, “Toward a Smarter NEPA: Monitoring and Managing Government’s Environmental Performance” (2002) 102(4) Columbia Law Review 903 at 912; Ted Schrecker, “The Canadian Environmental Assessment Act: Tremulous Step Forward, or Retreat into Smoke and Mirrors?” (1991) 5 CELR 192). Indeed, it is the potential for political accountability that at least partially drives better decision-making.

This dynamic provides a reasonable explanation for why Alberta and Saskatchewan appeared so uncomfortable with the mere idea that upstream greenhouse gas emissions be assessed, which initially prompted Ontario’s Energy Minister to ask what they were so afraid of. And while an upstream assessment of Energy East’s greenhouse gases appears to be off the table for now, time will tell whether that position is deemed consistent with the expressed will of the Quebec legislature. In the meantime, the result is that not a single Canadian jurisdiction – neither Alberta, the federal government (through the NEB), nor any of the other provinces – is assessing the upstream greenhouse gas emissions associated with the various pipeline projects currently being proposed.

An earlier version of this post originally appeared on ABlawg, the University of Calgary Faculty of Law’s Blog.

Conference Announcement: St. Gallen International Energy Forum

Alexander Goebel, head of organization of the St. Gallen International Energy Forum, asks me to pass on the following conference announcement:

After a one year intermission, the St. Gallen International Energy Forum will return on November 27th and 28th 2014. We will welcome more than 15 speakers – from practice, academia and the EU institutions – from both sides of the Atlantic. They will present on up-to-date topics, including inter alia: the EU internal energy market, shale gas as well as energy dispute resolution.

Date: 27th (evening) and 28th (full day) of November 2014

Location: St.Gallen, Switzerland

Programme: http://www.sg-ief.ch/programme/

Flyer: http://www.sg-ief.ch/flyer

Registration: Registration is possible on our website: http://www.sg-ief.ch/conference-registration/

Chairs: Prof. Dr. Dr. h.c. Carl Baudenbacher & Dr. Dirk Buschle

Please refer to our flyer at www.sg-ief.ch/flyer for a full list of our speakers and the topics covered.

If you have any questions, do not hesitate to contact us at contact@sg-ief.ch.

Screen Shot 2014-08-08 at 11.32.42 AM

Guest Post on New Book: Energy Law: A Context and Practice Casebook

To start,  I want to say thank you to Professor Coleman for allowing me to join him for a few guest posts here at the Energy Law Professor. I am Professor of Law at the West Virginia University College of Law where I teach and research energy law and policy and business law as part of the Center for Energy and Sustainable Development and I direct our new LLM in Energy and Sustainable Development Law. I am also a co-editor of the Business Law Prof Blog.

In the future, I will share some posts on my research projects, many of which can be found here. For my first post, I’ll take this chance to announce the result of another project: my  new casebook, Energy Law: A Context and Practice Casebook, which is at the printer and will be available for use in fall courses. This book provides a different focus than most casebooks and is designed to allow law teachers to provide a comprehensive introduction to energy law in a way that makes students more practice ready in all aspects of the law, especially energy. The book provides practical context for students as they learn doctrine, helps students develop practical skills, and requires students to think about their respective professional identities by integrating and highlighting ethical considerations that lawyers are likely to encounter.

The text is part of the Carolina Academic Press Context and Practice Series, edited by Michael Hunter Schwartz, Dean at the University of Arkansas at Little Rock, William H. Bowen School of Law.  He explains the series, in part, as follows:

A few principles are core to the series’ vision. Best Practices recommends that law professors set high expectations, “engage the students in active learning,” “give regular and prompt feedback,” “help students improve their self-directed learning skills,” “employ multiple methods of instruction,” and, in particular, “use context-based instruction.” Educating Lawyers argues that law professors need to do a better job helping students build practice skills and develop their professional identities.

With that in mind, here’s how I introduce the structure of my book to students:

This casebook is designed to provide insight into the energy law in the broadest sense. As with any broad and new area of the law, learning energy law can sometimes feel like drinking from a fire hose. The goal of this casebook is to help make learning the concepts (and, ultimately, practice) a little more manageable. As such, this casebook does not purport or attempt to be a comprehensive look at energy law. Instead, the book is designed to provide an introduction to the broad and varied legal and policy issues faced by those working in today’s energy industry.

Particular focus in the casebook is taken to help facilitate an understanding of basic concepts and terminology, which can be one of the most difficult parts of understanding energy law issues. In fact, even courts can have a hard time clearly explaining, and thus understanding, the concepts before them. Once the basic concepts and terms are understood, finding the answers to difficult questions in energy law becomes more manageable, though never easy.

There are several different ways to organize and structure a course in energy law. This casebook is organized to link concepts and resources in a way in which one might encounter them in legal practice or policy settings, rather than structured by the energy resource itself. Thus, as an example, natural gas is not a specific chapter in this book. Instead, natural gas issues related to mineral leasing are encountered with the similar process for coal and oil. Natural gas used for electricity generation is covered as one of the resources in the electricity resources chapter. And the economic regulation of natural gas as a commodity is covered in the chapter on economic regulation and market structure.

Chapters begin with a vocabulary section to help students with some of the basic terms and ideas they will encounter in the materials.  Most chapters also provide a “client issue” that frames how students should think about the materials they read.  In practice, attorneys generally learn about new issues or areas because a client has presented them a problem.  The client issue does not necessarily cover every area of the chapter, but it gives students an area of focus for their reading.

This has been a four-year project, and I’m excited to see it come to fruition. I have been teaching with most of the materials for a while, and I find that they work well in helping students connect with the concepts and ideas. The book is very much intended to guide students in their learning, and even their research, by providing materials they would likely use in practice.  Thus, EPA and state-level-agency materials, federal and state commission decisions, and other materials complement the more traditional law review articles and cases.  In addition, the appendices include graphs, statutes, and state permit examples so that students see additional materials they may not encounter in law school course work.

The PDF of the book is available now for consideration, and I welcome inquiries (my contact information is here).  A teacher’s manual is also being developed and materials will be made available by the end of the summer.  I am happy to share those materials on a rolling basis, as well, for those interested.

The Energy Paradigm Has Shifted

I am very pleased to welcome guest-blogger Joe Tomain, who is Professor and Dean Emeritus at University of Cincinnati College of Law. Joe is also co-author, with regular guest-blogger Alexandra Klass and three other scholars, of a new energy law and policy text.

By Joe Tomain

On June 2 of this year, the Obama administration announced its Clean Power Plan (CPP).[1] This announcement is a game changer and it shifts the energy paradigm. Those phrases are often overused, however, in this instance they are fully apposite for two reasons.

First, the federal government has linked energy and the environment in ways in which they have not been linked in the past. This bringing together of energy and the environment is an essential move towards an effective energy transition for reasons that I will develop below. The second reason that this is a game changing move is because for too long the word in the street has been that the federal government will not take the lead in climate change efforts. The Clean Power Plan refutes that tightly held belief.

In one sense, the promulgation of the CPP is not surprising. Indeed, over 40 years of energy policy studies indicates that a transition away from a fossil fuel economy is a desirable policy preference.[2] Early studies, such as Limits to Growth[3] in 1974 and Amory Lovins’ Soft Energy Paths[4] in 1977 were critical of the dominant model of energy policy that relied on large-scale, capital-intensive, centralized energy projects particularly those wedded to fossil fuels and nuclear power. Those studies were wary of continued reliance on dwindling oil and natural gas resources.

The next wave of energy studies was born out of necessity and reaction to the energy crises of the 1970s. The distorted natural gas market, the bollixed wage and price controls on oil, the Arab Oil Embargo followed by the Iranian Embargo, and the collapse of the nuclear power industry all in a few years, put energy in the news in ways that it had not been before. Not only was energy a matter of industry and economic concern, consumers were frustrated by waiting and gas lines and were frustrated with rising energy bills. Studies by the Harvard Business School, the Ford Foundation, and Resources for the Future urged the United States to wean itself from reliance on Middle East oil precisely because of the threat of further economic dislocations.[5] To be sure, the studies also touted resource and energy conservation but did not put forward an aggressive plan for renewable resources or for energy efficiency.

Then a funny thing happened on the way to the next energy crisis – energy was out of the news for the last decades of the 20th century even though our dependence on foreign oil continued to increase through 2006. In the beginning of the 21st century, however, energy policy studies began to ramp up again. Bipartisan think tanks and nongovernmental organizations began publishing energy policy studies that continued warnings about dependence on foreign oil.[6] This new wave of studies, however, added a particular dimension to the energy policy discussion – the environment. A precursor for these studies was the UN report Our Common Future[7]that popularized the idea of sustainability for natural resources as well as for energy in order to improve the plight of everyone on the planet.

On the domestic front, the new energy policy studies concentrated on the environmental impacts of our traditional fossil fuel energy policy and began to highlight the challenges presented by climate change. In short, the policy community began to adopt a fairly wide consensus on the need for a transition to clean energy resources particularly renewable resources and energy efficiency.

The Clean Power Plan is of a piece with the trend to a cleaner future. More specifically, by linking energy and the environment, the CPP is breaking a barrier that has long existed between the disciplines of energy law and policy and environmental law and policy. It is a bit of an historic anomaly that the discipline of energy law was born in the mid-1970s in response to the crises noted above. The curiosity is that environmental law, particularly with the passage of the National Environmental Policy Act and associated environmental laws, was created as a discipline at the dawn of the 1970s. So, then, even though these two disciplines were developed close in time, they not only acted independently of each other they relied a separate set of assumptions, vocabularies, and metrics.[8]

Even though, energy law became known as a discipline in the 1970s, it had its predecessors. The most immediate predecessor was public utilities regulation. Energy law also incorporated elements of oil and gas laws and natural resources laws. By examining that welter of law, one can see that state common law and statutory law focused on the exploration and extraction of the natural resources used to produce energy. Federal laws, then, focused on the transportation, transmission, and distribution of those resources and of the electricity produced from them. In short, energy law was about exploration, production, and transportation and was grounded in the core assumption that the more energy that was produced and consumed, then the greater and more robust the economy would be.

Environmental laws were not chiefly concerned about extraction and production of resources as such. Instead, environmental laws addressed resource protection and conservation. Additionally, environmental laws focused on ecology and the human and natural environments in order to create more healthy ecosystems. Consequently, the metrics for energy law dealt energy prices, economic productivity, and the like. Environmental metrics measured the cleanliness of the water we drink, in the air we breathe, and the number of species we preserve.

At a superficial level, given the fact that energy and environmental systems are complex, the fact that they are independent regulation makes some sense. However, the physical reality is that throughout the fuel cycle from exploration to distribution to consumption, environmental consequences follow each step of that cycle. Energy and environmental laws and regulations, then, are physically linked to each other and, therefore, should be coordinated. Until the CPP, they have not been so treated.

Thus, the first significance of the Clean Power Plan is to have these two disciplines begin to address each other and to find a common language. Linking energy and the environment is a necessary step toward a clean energy future.

The second significant development of the CPP is that the federal government is now assuming a leadership role as long urged. Several of the policy studies mentioned above, as well as more recent ones, emphasize the need for federal leadership if energy and climate change are to be addressed in any meaningful way. [9] In part, the call for federal leadership resides in the fact that the US consumes 25% of the world’s energy resources and emits about 25% of the world’s greenhouse gases. If any international progress is to be made on the climate front, then the United States must play a leadership role.

On the domestic side, federal leadership is desirable for any number of reasons including the fact that while state energy initiatives are valuable in and of themselves, interstate coordination can advance a clean energy transition. On the electric side, for example, transmission line siting, a coordinated market for renewable energy credits, effective cost allocation for the development of the smart grid, and a rationalized set of renewable portfolio standards could benefit from national leadership. On the natural gas side, uniform disclosure rules for fracking chemicals, national water standards, and the like may help alleviate many of the concerns surrounding hydraulic fracturing. Further, the matter of energy subsidies, for both fossil and clean fuels, should be addressed responsibly and uniformly and national leadership in this arena should yield beneficial official results.

Thus, the Obama administration’s CPP is an important as well as necessary step in moving away from a fossil fuel economy to a clean energy future precisely because it begins to merge energy and the environment and puts federal leadership in play.

 

[1] Carbon Pollution Emission Guideline for Existing Stationary Sources: Electric Utility Generating Units, Fed. Reg. June 18, 2014) available at http://www2.epa.gov/carbon-pollution-standards/clean-power-plan-proposed-rule.

[2] Joseph P. Tomain, Ending Dirty Energy Policy: Prelude to Climate Change chs. 3 and 4 (2011).

[3] Donella Meadows et al., The Limits to Growth: A Report for the Club of Rome=s Project on the Predicament of Mankind ch. IV (1974).

[4] Amory B. Lovins, Soft Energy Paths: Toward a Durable Peace (1977).

[5] Robert Stobaugh & Daniel Yergin (eds.), Energy Future: Report of the Energy Project at the Harvard Business School (1979); Ford Foundation, Energy: The Next Twenty Years (1979); and, Sam H. Schur, et al., Energy in America’s Future: The Choices Before Us(1979) (Resources for the Future study).

[6] See e.g. Energy Future Coalition, Challenge and Opportunity: Charting a New Energy Future (2003) available at http://energyfuturecoalition.org/Resources; National Commission on Energy Policy, Ending the Energy Stalemate: A Bipartisan Strategy to Meet America’s Energy Challenges (2004) available at http://belfercenter.ksg.harvard.edu/publication/4000/ending_the_energy_stalemate.html; and,Natural Resources Defense Council, A Responsible Energy Plan for America (2005).

[7] World Commission on Environment and Development, Our Common Future (1987).

[8] Amy J. Wildermuth, The Next Step: The Integration of Energy Law and Environmental Law, 31 Utah Envt’l L. Rev. 369 (2011); Alexandra B.  Klass, Climate Change and the Convergence of Environmental and Energy Law, 24 Ford. Envt’l L. Rev. 180 (2013); Joseph P. Tomain, The Politics of Clean Energy: Moving Beyond the Beltway, 2 San Diego J. Climate & Energy L. 299 (2011-12).

[9] See e.g. Challenge and Opportunity, supra note 6; A Responsible Energy Plan for America, supra note 6; Ending the Energy Statelmate, supra note 6; Institute for  21st Century Energy, Energy Works for US: Solutions for Securing America’s Future 3 (2013) (Energy Works) available at http://www.energyxxi.org/energy-works-for-us;  William Norhdaus, Climate Casino (2013).

 

The Shale “Revolution” Is About Gas *Prices* & Oil *Production*

I’d like to make a quick point about the “shale revolution,” which may be old news to those immersed in North American energy policy but might be helpful to those just starting to think about the wider implications of increased North American production of oil and gas.

Increased production of oil & gas from shale formations using hydraulic fracturing and horizontal directional drilling is often referred to as North America’s shale revolution because of the way it has transformed oil & gas production, reserves, production, and pricing. But the “revolutionary” part of these changes mostly boils down to two big changes: 1) natural gas prices, which were rising, are now falling, and 2) oil production, which was falling, is now rising.

Increased production of natural gas has had a dramatic effect on natural gas prices because natural gas is hard to transport. If you can’t send natural gas by an existing pipeline to an existing market, your next best option may be to cool it into a liquid at −162 °C, load the liquid onto a giant, insulated, quarter-billion dollar vessel and ship it across the ocean, where it can be regasified and burned. This is an expensive process, so when natural gas production rises, prices fall quickly because there is little use for the excess gas in the markets it can reach. Prices will keep falling until 1) gas is so cheap that energy users reliant on alternatives like coal and heating oil switch to gas, 2) gas is so cheap that it can be profitably liquefied and sent overseas, or 3) gas is so cheap that it’s no longer worthwhile to keep expanding production. In the United States, there has been a bit of all three: 1) utilities and manufacturers have started to use more gas, 2) companies are planning several projects to export liquefied natural gas to Asia and Europe, and 3) there has been a bit of a slowdown in investment in new shale gas production. But natural gas prices can fall pretty far before any of these stabilizing factors kick in.

In contrast, despite all the recent controversies about oil pipelines and rail transport, oil is still relatively cheap to transport because you can send it by train or boat. And there is an integrated, worldwide market in oil so world oil prices tend to move in tandem. This means that increased production in the U.S. has little effect on U.S. oil prices. But a stable price means that oil producers can keep ramping up production at every possible opportunity and keep earning large profits. That’s why the shale revolution in oil has been about production levels, not prices. And it’s also why incomes have risen much faster in states with shale oil than states with shale gas.

So that’s why I say the shale revolution is mostly about 1) gas prices, not gas production, and 2) oil production, not oil prices. The following four charts show oil & gas production and prices from 1997-2013. They show that the shale revolution in the US has turned around rising natural gas prices and falling oil production. You can also see a more gradual increase in natural gas production. Finally, you can see that U.S. oil prices show little impact from all that increased production.

 

 

With increased challenges to crude transportation and growing liquefied natural gas markets, gas and oil markets may become somewhat more similar over time. But for now they are very different. So when you talk about the shale “revolution,” keep in mind whether you are discussing oil or gas and prices or production. It will help you make sense of many of the developments in energy markets and policy and will help you sort out some of the talking points from those arguing that the shale “revolution” changes everything and those arguing it changes nothing.

 

 

1 2 3 4