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July 2012Vol. 15, No. 3

MESSAGE FROM THE CHAIRS

Mary Ellen TernesRobert B. McKinstry, Jr.

The CCSDE Committee has continued to be active, asdemanded by the continuing developments in the lawrelated to climate change, sustainable development,and ecosystems. The Committee co-sponsored ateleconference with the Environmental Law Institute onthe day following the D.C. Circuit’s decision affirmingthe Environmental Protection Agency’s (EPA’s)greenhouse gas (GHG) endangerment finding, tailpiperule, timing rule, and tailoring rule in Coalition forResponsible Regulation v. EPA, No. 09-1322 (D.C.Cir. June 26, 2012). A panel including representativesof the litigants in the case provided an excellent analysisof decision’s highlights.

CCSDE Vice Chair John Dernbach attended theUnited Nations Rio+20 sustainability conference in Riode Janeiro, Brazil, June 13–22, 2012, along with afive-member ABA delegation. John and the membersof the delegation will be participating in a July 25teleconference describing its results and opportunitiesfor SEER involvement in future initiatives.We look forward to seeing you at the SEER FallMeeting in Austin, Texas. Several CCSDE proposalshave been accepted for that meeting. These include asession on EPA regulation of the utility industry and anupdate on the future of GHG cap-and-trade.

This issue begins with a lengthy calendar of federal andstate judicial and regulatory development compiled by

J. Cullen Howe. A highlight is the decision of the D.C.Circuit in Coalition for Responsible Regulation v.EPA (the Greenhouse Gas Rules). As noted in theChair’s Message, this decision will be explored inforthcoming Committee events and is likely to be thefocus of continuing discussion.

Three articles in this issue offer diverse focus. The first,by Dallas Burtraw, David McLaughlin, and Sarah JoSzambelan, reviews the California cap-andtrade-program. Although this program has been discussed inprevious issues, the authors, economists affiliated withResources for the Future, provide a broaderdescription of the regulatory framework of whichtrading is only one part. They defend the programwhile noting one significant legal issue with respect tothe status of revenues to be raised from auctions ofemission permits: if a “fee,” the system is valid; if a“tax,” it fails.

The second article, by J. Cullen Howe, our judicialdevelopment contributor, reviews the ongoingcontroversy regarding state and local propertyassessed clean energy financing (PACE). Theseprograms attempt to assist homeowners to finance theupfront cost of clean energy improvements secured bya lien on the property. Twenty-seven states and severalmunicipalities have adopted versions of the PACEconcept. However, in July 2010, issuers of federallybacked mortgages, Fannie Mae and Freddie Mac,announced that PACE liens were an unacceptable riskresulting in virtually all such programs being put on holdor discontinued. The future of the PACE concept isnow before the Congress and in litigation.

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Climate Change, SustainableDevelopment, and EcosystemsCommittee NewsletterVol. 15, No. 3, July 2012Gabriel Calvo and Alan S. Miller,Co-Editors

In this issue:

Message from the ChairsMary Ellen Ternes andRobert B. McKinstry, Jr. .......................... 1

Regulatory Developments by the U.S.Environmental Protection AgencyLeslie A. Griffith ....................................... 2

Judicial DevelopmentsJ. Cullen Howe ........................................ 3

Introduction to California’s Cap-and-TradeProgramDallas Burtraw, David McLaughlin,and Sarah Jo Szambelan ...................... 14

Recent Controversy and LitigationConcerning Property Assessed Clean Energy(PACE) FinancingJ. Cullen Howe ...................................... 19

Industries Align to Challenge EPA E15WaiversSarah Melchior ...................................... 23

Copyright © 2012. American Bar Association. Allrights reserved. No part of this publication may bereproduced, stored in a retrieval system, ortransmitted in any form or by any means,electronic, mechanical, photocopying, recording,or otherwise, without the prior written permission ofthe publisher. Send requests to Manager,Copyrights and Licensing, at the ABA, e-mail:copyright@americanbar.org.

Any opinions expressed are those of thecontributors and shall not be construed torepresent the policies of the American BarAssociation or the Section of Environment,Energy, and Resources.

The third article, by Sarah Melchior, a 2013 JDcandidate at the William and Mary School of Law,reviews a pending DC Circuit challenge (NationalGrocery Manufacturers Association v. EPA) toEPA’s issuance of waivers from Clean Air Actprohibitions on fuel additives, which can cause failuresto automobile emission control devices. The waivers,granted in October 2010 and January 2011, weregiven for E15, a fuel additive made with ethanol. Theprimary legal issue is whether the Clean Air Act givesEPA the authority to issue waivers for a subset ofvehicles made for model year 2001 and later. Industrypetitioners also must satisfy challenges to their standing.

REGULATORY DEVELOPMENTS BY THEU.S. ENVIRONMENTAL PROTECTION

AGENCY

Leslie A. Griffith

EPA Proposes Revised NAAQS forParticulate Matter

On June 29, 2012, under a court-ordered deadline,the Environmental Protection Agency (EPA) proposedrevised National Ambient Air Quality Standards(NAAQS) for particulate matter (PM). EPA proposesto lower the annual primary standards for fine PM(PM

2.5) from 15.0 to between 12.0 and 13.0

micrograms per cubic meter and to maintain the current24-hour standard. For coarse PM (PM

10-2.5), EPA

proposes to maintain the current 24-hour standard.EPA is revising the secondary standard, which protectswelfare, to create a PM

2.5--specific visibility index.

EPA is holding two public hearings in July and willreceive comments until August 31, 2012. 77 Fed. Reg.38890 (June 29, 2012).

Leslie Griffith is a third-year student at HarvardLaw School and an editor on the Harvard LawReview.

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JUDICIAL DEVELOPMENTS

J. Cullen Howe

Court and Agency Decisions

Coalition for Responsible Regulation v. EPA (D.C.Cir. June 26, 2012): The D.C. Circuit issued a highlyanticipated decision dismissing all challenges to theEnvironmental Protection Agency’s (EPA’s)greenhouse gas (GHG) regulations and reaffirming therules in their entirety. The ruling upheld four aspects ofthe rules, including the endangerment finding rule, thetailpipe rule, the tailoring rule, and the timing rule. Inparticular, the court concluded that the endangermentfinding and tailpipe rule were neither arbitrary norcapricious; EPA’s interpretation of the governing CAAprovisions was unambiguously correct; and nopetitioner had standing to challenge the timing andtailoring rules. The court dismissed for lack ofjurisdiction all petitions for review of the timing andtailoring rules and denied the remainder of the petitions.Fourteen states and several industry groups hadchallenged EPA’s rulemaking, alleging that the agencyoverstepped its authority when it declared that GHGemissions endangered human health and that it intendedto regulate these emissions under the Clean Air Act.

Building Industry Association of Washington v.Washington State Building Code Council (9th Cir.June 25, 2012): The Ninth Circuit affirmed a districtcourt decision that found that an energy-efficientbuilding energy code adopted by the WashingtonBuilding Code Council in 2009 met the requirementsfor obtaining an exemption under the Energy Policyand Conservation Act (EPCA). Specifically, the courtheld that the 2009 Code met all seven requirements forobtaining a building code exemption under the statute.EPCA sets federal energy efficiency guidelines forresidential appliances used in buildings, includingheating, ventilation, and air conditioning equipment.EPCA also requires that states adopt and periodicallyrevise their building energy codes to comply with theInternational Energy Conservation Code (IECC).While EPCA prohibits imposing state regulations thatare stricter than those set by the IECC, it does allowfor exceptions for state energy codes as long as they

meet seven enumerated requirements. In February2011, the district court held that the Council did notviolate EPCA when it enacted the 2009 Code.Specifically, the court held that the 2009 Code met allseven of EPCA’s requirements to obtain a buildingcode exception under the statute. The Ninth Circuitaffirmed, holding that the Code met all sevenrequirement to obtain an exception.

Chabot-Las Positas Community College District v.EPA (9th Cir. May 4, 2012): The Ninth Circuit issueda ruling upholding the first power plant permit thatincludes a GHG emission limit, although the decisiondoes not discuss the GHG requirement. A communitygroup challenged the air permit for the Russell CityEnergy Center, a 600 megawatt (MW) natural gasfacility in Hayward, California. In upholding the permit,the court found that EPA’s decision not to require a24-hour particulate matter standard in an arearedesignated as a nonattainment area during thepermitting process was supported by precedent.

Rocky Mountain Farmers Union v. Goldstene (9thCir. Apr. 23, 2012): The 9th Circuit held that Californiacould continue to enforce its low-carbon fuel standardpending the state’s appeal of a December 2011 districtcourt decision holding that the standard wasunconstitutional. The decision in effect lifted aninjunction issued by the district court pending appeal.In the December 2011 decision, the district court heldthat because the standard assigns more favorablecarbon intensity values to corn-derived ethanol inCalifornia than to ethanol derived outside California, itimpermissibly discriminates against out-of-state entities.In addition, the district court held that the standardimpermissibly regulates channels of interstatecommerce. The district court further held that althoughthe standard serves a legitimate local purpose, thatpurpose could be accomplished through othernondiscriminatory means. The standard aims to reducethe carbon intensity of transportation fuels in Californiaby at least 10 percent by 2020.

Conservancy of Southwest Florida v. U.S. Fish andWildlife Service (11th Cir. Apr. 18, 2012): The 11thCircuit affirmed a district court decision dismissing alawsuit challenging the U.S. Fish and Wildlife Service’s

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denial of petitions to designate critical habitat for theFlorida panther. In 2009, several environmentaladvocacy groups petitioned the FWS to initiate suchrulemaking, contending that the species was suffering adecline in population due to fragmentation anddegradation of its habitat caused, in part, by climatechange. The FWS denied the petitions on the groundsthat the measures it was already taking were sufficient.The groups subsequently filed suit in federal court,alleging that the denial violated the AdministrativeProcedure Act and the Endangered Species Act. Thedistrict court granted the FWS’ motion to dismiss,holding that the FWS’ decision was committed toagency discretion by law and thus it could not bereviewed. On appeal, the 11th Circuit affirmed onidentical grounds.

Public Service Co. of New Mexico v. EPA (10thth

Cir. Mar. 1, 2012): The 10th Circuit denied withoutcomment a request from the Public Service Companyof New Mexico and Governor Susana Martinez todelay implementing pollution control technology at theSan Juan Generating Station in the state. EPA orderedthe PSC, the state’s largest utility and operator of theplant, to retrofit it with selective catalytic reductiontechnology to bring the plant into compliance with theCAA within five years. The PSC appealed EPA’sorder, calling its estimated $750 million price tagunnecessary and expensive. The 10th Circuit deniedthe request.

Alec L. v. Jackson (D.D.C. May 31, 2012): Fivechildren, along with the groups Kids vs. GlobalWarming and WildEarth Guardians, sued the headsof several federal agencies for failing to adequatelyaddress global warming. The plaintiffs proceeded onthe theory that the atmosphere is a commonly sharedpublic resource that defendants, as agency heads, havea duty to protect under the public trust doctrine. Asrelief, plaintiffs asked for an injunction directing thenamed federal agencies to “take all necessary actionsto enable carbon dioxide emissions to peak by 2012and decline by at least six percent per year beginning in2013.” Defendants and intervenors argued in a motionto dismiss that plaintiffs failed to state a valid claim forrelief. The district court agreed and dismissed the suit.Relying on the recent Supreme Court decision PPL

Montana, LLC v. Montana, 132 S. Ct. 1213 (2012),the court held that the public trust doctrine is a matterof state, not federal, law. It further held that even if thepublic trust doctrine were a federal common law claim,such a claim has been displaced in this case by theClean Air Act (as was similarly held in the 2011Supreme Court case American Electric Power Co.v. Connecticut, 131 S. Ct. 2527).

Shell Gulf of Mexico, Inc. v. Greenpeace (D. AlaskaMay 30, 2012): Shell Oil filed a lawsuit in Alaskafederal court seeking to block environmental activistsfrom barricading or occupying its drilling ship boundfor the Arctic. The company alleged that Greenpeacemembers unlawfully boarded its ship in New Zealandand chained themselves to drilling equipment meant tostop the ship from reaching the Chukchi Sea. Thecompany alleged causes for action for, among otherthings, nuisance, piracy, malicious mischief on the highseas, tortious interference with contractual relations,trespass, false imprisonment, and recklessendangerment. Greenpeace moved to dismiss. Thecourt granted the motion in part, dismissing the publicnuisance and tortious interference claims, but declinedto dismiss the other causes of action. It also expandeda previously granted restraining order blocking activistsfrom barricading or occupying the company’s shipsbound for the Arctic.

WildEarth Guardians v. Salazar (D.D.C. May 10,2012): Several environmental groups filed an actionconcerning the Bureau of Land Management’s (BLM)decision to auction off several leases in the PowderRiver Basin, a region in northeastern Wyoming andsoutheastern Montana that includes all ten of thehighest-producing coal mines in the United States. Thelawsuit alleged that the agency violated NEPA byfailing to adequately analyze the impacts of increasedGHG emissions resulting from the sale of the leases.The district court dismissed the action, holding that thegroups lacked standing to maintain the action.

Loorz v. Jackson (D.D.C. Apr. 2, 2012): A federaldistrict court in Washington D.C. issued a decisionallowing business groups to intervene in a lawsuit thatseeks to require the federal government to establish aplan for an immediate cap on GHG emissions and start

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lowering these emissions by 6 percent a year beginningin 2013. Several advocacy groups, including OurChildren’s Trust, filed the federal lawsuit in May 2011along with similar actions in many states. The lawsuitalleges that the federal government has a duty underthe public trust doctrine to reduce GHG emissions inthe atmosphere. Thus far, none of the state actionshave been successful.

Comer v. Murphy Oil USA (S.D. Miss. Mar. 20,2012): A federal district court in Mississippi dismissedthe case, holding that the doctrines of res judicata andcollateral estoppel bar claims for trespass, nuisance,and negligence against numerous oil, coal, electric, andchemical companies for damages allegedly stemmingfrom Hurricane Katrina. The lawsuit alleged that thecompanies’ activities amount to the largest sources ofGHG emissions and that climate change led to high seatemperatures and sea level rise that fueled thehurricane, which in turn damaged their property. Thecourt held that the lawsuit was nearly identical to theindividuals’ 2005 lawsuit. The court also found that theplaintiffs lacked standing because their claims were notfairly traceable to the companies’ conduct, that thelawsuit presented a nonjusticiable political question,that all of the claims were preempted by the Clean AirAct, that the claims were barred by the applicablestatute of limitations, and that the plaintiffs could notdemonstrate that their injuries were proximately causedby the companies’ conduct. In the 2005 lawsuit, thedistrict court granted defendants’ motion to dismiss.On appeal, a panel of the Fifth Circuit partiallyreversed, holding that plaintiffs had standing to asserttheir public and private nuisance, trespass, andnegligence claims, and that none of these claimspresented nonjusticiable political questions. The FifthCircuit subsequently granted a motion for en bancreview, but then because of a loss of quorum, the courtdismissed the en banc review, which had the effect ofreinstating the district court decision dismissing thecase. The plaintiffs appealed for a writ of mandamus tothe U.S. Supreme Court, which was denied.

Center for Biological Diversity v. EPA (D.D.C. Mar.20, 2012): Several environmental groups filed anaction seeking to force EPA to regulate GHGemissions from aircraft, ships, and nonroad engines

used in heavy industrial equipment. According to thecomplaint, these sources produce about a quarter ofthe GHG emissions from mobile sources in the UnitedStates but have not yet been regulated by EPA. In aJuly 2011 decision, the district court held that EPA isnot required to issue endangerment findings under theClean Air Act for GHG emissions from marine vesselsand nonroad vehicles and engines but held that it isrequired to issue such findings for aircraft engines. EPAmoved to dismiss several additional causes of action inthe complaint concerning GHG emissions and blackcarbon from nonroad vehicles and engines. The districtcourt denied the motion as moot given that EPA agreedto respond to three outstanding petitions by plaintiffswithin ninety days.

Sierra Club v. U.S. Dept. of Agriculture (D.D.C.Jan. 31, 2012): A federal district court in the District ofColumbia held that USDA’s Rural Utilities Serviceviolated NEPA by failing to prepare an environmentalimpact statement (EIS) in connection with itsinvolvement in the expansion of a coal-fired powerplant in Kansas. The court held that because theService provided approvals and financial support tothe project, its involvement amounted to a “majorfederal action” within the meaning of NEPA. The courtheld that the Service cannot issue any approvals orarrangements directly related to the project until an EISis completed.

United States v. Ameren Missouri (E.D. Mo. Jan.27, 2012): A federal district court in Missouridismissed an EPA action seeking civil penalties fromthe owner of two coal-fired power plants concerningtwo modifications in 2002 and 2004, holding that thefive-year statute of limitations had run. The complaintalleged that the company modified the plants inviolation of significant deterioration requirements underthe Clean Air Act, the Missouri state implementationplan, and the company’s Title V operating permit. Thecourt rejected EPA’s arguments that the plants havecontinued to be in violation since 2002 and 2004,holding that these projects were finished in those yearsand that the Title V permits, while prohibitingconstruction and beginning operation without a permit,do not prohibit ongoing operation without a permit intoperpetuity.

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Rocky Mountain Farmers Union v. Goldstene (E.D.Cal. Jan. 23, 2012): A federal district court inCalifornia denied a motion by the California AirResources Board (CARB) to lift an injunction blockingenforcement of the state’s low-carbon fuel standard,concluding that it lacked authority to do so becauseCARB appealed the orders and thus it was withoutjurisdiction to do so. Previously, on December 29,2011, the court granted a preliminary injunction,holding that because the standard assigns morefavorable carbon intensity values to corn-derivedethanol in California than to ethanol derived inCalifornia, it impermissibly discriminates against out-of-state entities.

American Petroleum Institute v. Cooper (E.D.N.C.Dec. 16, 2011): A federal district court in NorthCarolina granted a summary judgment motiondismissing a challenge by an industry group that aNorth Carolina law requiring oil refiners and producersto sell wholesalers gasoline unblended with ethanol ispreempted by federal law. The dispute arose becausea federal excise tax credit allows a party that blendsethanol with gasoline to claim a credit against itsgasoline excise tax obligations to the IRS. The statestatute has the effect of preventing suppliers fromreceiving the tax credit. The court held that the statelaw does not interfere with federal law and onlyrequires that suppliers that import gasoline into NorthCarolina give distributors and retailers the option tobuy gasoline that is not pre-blended.

EPA Response to Petitions Seeking Regulation ofGreenhouse Gas Emissions From Aircraft, MarineEngines, and Nonroad Vehicles (EPA, undated): EPAformally responded to three petitions requesting thatthe agency regulate GHG emissions from aircraft,marine engines, and other nonroad vehicles andengines under the Clean Air Act. With respect to thepetition for aircraft regulations, which was filed inDecember 2007, EPA stated that it intends to initiate arulemaking after the D.C. Circuit rules in Center forResponsible Regulation v. EPA and projected that aproposed rule for aircraft would take approximatelytwenty-two months to develop. In a separate decision,EPA denied petitions filed in October 2007 andJanuary 2008 seeking regulation of GHG emissions

from marine engines and nonroad vehicles and engineson the ground that undertaking such a rulemakingwould require significant resources and detract frommore pressing issues in the mobile sources area.

Association of Irritated Residents v. California AirResources Board (Cal. Ct. App. June 19, 2012): ACalifornia appellate court held that the California AirResources Board (CARB) did not violate the statutoryrequirements of the Global Warming Solutions Act,otherwise known as AB 32, in approving a strategy toimplement the statute. In particular, the court held thatCARB did not disregard the law or act arbitrarily orcapriciously in adopting the scoping plan. In June2009, environmental justice groups filed suit objectingto the cap-and-trade program, alleging that it wouldharm low-income and minority populations because theprogram allows industrial sources of emissions topurchase credits rather than reduce carbon emissions,which would in turn curb emissions of other pollutants.

Thrun v. Cuomo (N.Y. Sup. Ct. Albany Co. June 13,2012): A New York state court dismissed a lawsuit thatsought to block the state’s participation in the RegionalGreenhouse Gas Initiative (RGGI) on standinggrounds. The plaintiffs, three taxpayers, filed thelawsuit alleging that the state had no authority to enterinto RGGI without authorizing legislation from the statelegislature. Specifically, the lawsuit alleged that NewYork’s participation in the program constituted a taxthat can only be approved by the state legislature andthat it is unconstitutional because it infringes on federalauthority to regulate air pollution and transmission ofelectric power across state lines. The plaintiffs furtheralleged that they suffered economic damages in theform of higher electricity rates due to the program. Thecourt disagreed and dismissed the lawsuit, holding thatplaintiffs could not show standing because their allegedharm was no different than that of the general public.Because plaintiffs failed to establish that as ratepayersthey suffered an injury distinct from that of the generalpublic, they could not assert standing on the basis ofthat alleged harm. The court further held that even if theplaintiffs could assert standing, the case would bedismissed on laches grounds given that the stateimplemented its regulations in 2008 and the lawsuitwas not filed until 2011.

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Healdsburg Citizens for Sustainable Solutions v.City of Healdsburg (Cal. Ct. App. June 4, 2012): ACalifornia state court awarded attorney fees to acitizens group after the court granted in part its petitionfor a writ of mandate challenging an environmentalimpact report (EIR) under the California EnvironmentalQuality Act of a resort development. In particular, thecourt found that the EIR was defective for failing tostudy the water demand associated with vegetation tobe planted as part of the mitigation measures, failing toconsider the project’s aesthetic effects on local vistapoints and trails and failing to consider a sufficientrange of viable alternatives. However, the courtrejected the group’s challenge to the EIR’s analysis ofGHG emissions, among other things. The group movedfor attorney fees under state law, which the trial courtpartially granted on the grounds that the action hadenforced an important right affecting the public, hadconferred benefits on a large group, and the necessityof the action and the financial burden made the awardappropriate. On appeal, the California Court ofAppeals affirmed, holding that the award of$382,189.73 was appropriate.

Sierra Club v. Texas Commission onEnvironmental Quality (Texas Dist. Ct., Travis Co.May 14, 2012): Two environmental nonprofits filed alawsuit challenging a Texas state agency’s approval ofa $3 billion, 1,300 MW coal-fired power plant inCorpus Christi, alleging that the state incorrectlyevaluated possible air pollution from the facility inviolation of CAA regulations. On May 14, 2012, in aletter to the parties, the judge assigned to the caseindicated that he would reverse the agency’s approvalgiven that it had made several significant errors whenissuing the permit, including not specifying the location,control, and method of material handling. In addition,the permit did not require compliance with several EPArules, including the NAAQS for 1-hour sulfur dioxideand nitrogen oxide, as well as the mercury and airtoxics standards.

Consolidated Irrigation District v. City of Selma(Cal. Ct App. Apr. 26, 2012): An irrigation district inCalifornia petitioned for a writ of mandate challengingthe City of Selma’s use of a negative declaration underCEQA in approving a 160-unit, 44-acre residential

development. The trial court granted the petition,holding that the negative declaration did not adequatelyaddress GHG emissions from the project. Theappellate court affirmed, holding that the district hadstanding to maintain the action and that the evidence inthe record should not have been discounted by the cityabsent a credibility determination. Subsequently, thedistrict moved for leave to conduct limited discoveryand to augment the administrative record. The trialcourt denied the motion. On appeal, the appellatecourt reversed, holding that the record should havebeen augmented to include, among other things, the2007 Intergovernmental Panel on Climate Change,Fourth Assessment Report.

Citizens for Open Government v. City of Lodi (Cal.Ct. App. Mar. 28, 2012): Two citizen groupschallenged the reapproval by the City of Lodi of aconditional use permit for a proposed shopping centerproject after the original environmental impact report(EIR) issued pursuant to the California EnvironmentalQuality Act (CEQA) was revised and recertified.Among other things, the plaintiffs alleged that astipulation entered into between them, the City, and thedeveloper allowed them to litigate what wouldotherwise be barred by res judicata, including thealleged failure to adequately address the impacts ofGHG emissions and climate change. The trial courtdismissed the petition. On appeal, the appellate courtaffirmed. Although it held that the plaintiffs were notbarred from raising the issue with respect to climatechange and that the EIR failed to analyze this issue, itdid not require recirculation of the EIR because thisdeficiency did not make it fatally flawed.

AES Corp. v. Steadfast Insurance Co. (Vir. Sup. Ct.Apr. 20, 2012): The Virginia Supreme Courtreaffirmed its previous holding that an insurancecompany has no obligation to defend or indemnify anenergy company against a lawsuit alleging that its GHGemissions were contributing to the destruction of anAlaskan village. AES was sued by the Alaskan coastalvillage of Kivalina, a case that is now before the 9thCircuit. The insurance company refused to defend orindemnify AES in the litigation, declaring that thedamage allegedly caused by AES’s emissions was notthe result of an accident or occurrence covered by its

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policy. AES sued the insurance company in Virginiastate court, contending that the damages alleged by itsemissions were the result of a covered occurrence. Thetrial court dismissed the case. AES appealed the caseto the Virginia Supreme Court, which affirmed. AESrequested a rehearing, which the court granted. Uponrehearing, the court reaffirmed its prior holding, statingthat the allegations by the village were that its damageswere the result of AES’s intentional actions and not anaccident or other occurrence covered by the policy.

Neighbors for Smart Rail v. Exposition Metro LineConstruction Authority (Cal. Ct. App. Apr. 17,2012): A California appellate court affirmed a rulingthat held that a public authority responsible forconstructing a light rail line connecting downtown LosAngeles with Santa Monica did not violate theCalifornia Environmental Quality Act (CEQA) when itanalyzed the impact of the project on, among otherthings, GHG emissions using as baseline conditionsprojected for 2030. The court rejected the notion thatCEQA forbids, as a matter of law, the use of projectedconditions as a baseline. The petitioners had arguedthat CEQA required the authority to use baselineconditions that existed sometime between when thenotice of preparation of the construction phase wasfiled in 2007 and when the authority certified the finalenvironmental impact report (EIR) in 2010. Theappellate court disagreed, holding that the projectwould not begin operating until 2015 at the earliest andthus its impact would yield no practical information todecision makers or the public until that time.

Sierra Club v. Mississippi Public ServiceCommission (Miss. Sup. Ct. Mar. 15, 2012): In aunanimous decision, the Mississippi Supreme Courtreversed a 2010 decision by the Mississippi PublicService Commission that permitted a company toconstruct a $2.4 billion coal-fired power plant inKemper County. The plant was to burn locally minedlignite coal and employ a novel type of IntegratedGasification Combined Cycle Gasification technologycalled “TRIG,” which has never before been used on acommercial scale. The company proposed to capturethe carbon dioxide associated with burning the gasifiedlignite and sell it to oil companies who would thensequester it in unidentified geologic formations. TheSierra Club challenged the approval on a number of

grounds, including that the carbon sequestration planhad no buyer for the carbon dioxide and that theelectricity that would be produced was not in factneeded. The Supreme Court, in a short opinion, heldthat the Commission’s approval was not supported bysubstantial evidence and thus remanded the case forfurther proceedings.

California Building Industry Association v. BayArea Air Quality Management District (Cal. Super.Ct. Mar. 5, 2012): A California state court issued adecision ordering the Bay Area Air QualityManagement District to set aside, depublish, and stopthe circulation of thresholds of significance for GHGemissions when conducting CEQA analyses. Thethresholds were intended to be used by the District andother local agencies in the San Francisco Bay Area todetermine whether a local land use project would havesignificant air quality impacts under CEQA. In 2010,the District adopted a resolution which includednumeric air quality thresholds, including GHGemissions, for analyses by lead agencies under CEQA.If a project’s emissions exceeded the thresholds, itwould result in a finding of significant impactnecessitating preparation of an EIR and adoption ofmitigation measures. A building industry associationfiled suit, alleging that the District did not analyze thethresholds as a project under CEQA and failed tostudy their impact on future development patterns. Thecourt agreed, holding that the thresholds should be setaside pending full CEQA compliance.

University of Virginia v. Virginia Attorney General(Vir. Sup. Ct. Mar. 2, 2012): The Virginia SupremeCourt set aside subpoenas issued by the VirginiaAttorney General, holding that he did not haveauthority to demand records related to a formerUniversity of Virginia climate researcher’s work. In2010, the attorney general issued a civil investigativedemand for documents, seeking information on fivegrant applications prepared by former professorMichael Mann and all e-mails between Mann and hisresearch assistants, secretaries, and thirty-nine otherscientists from across the country. A Virginia trial courtjudge set aside the demand, holding that four of the fivegrants were issued by the federal government and thusthe attorney general could not question the professorabout them. In addition, the court held that the

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document requests were not specific enough becausethey did not show sufficient reason to believeincriminating documents existed. With regard to thestate grant, the court held that the attorney generalcould question the professor about it. The VirginiaSupreme Court agreed to hear arguments related tothe state grant, concluding that the University was not a“person” under the Virginia Fraud Against TaxpayersAct (FATA) and thus the subpoenas, which werepredicated on enforcement of FATA, were invalid.

Consolidated Irrigation District v. City of Selma(Cal. Ct. App. Feb. 8, 2012): An irrigation district inCalifornia petitioned for a writ of mandate challengingthe City of Selma’s use of a negative declaration underCEQA in approving a 160-unit, 44-acre residentialdevelopment. The trial court granted the petition,holding among other things that the evidence presentedsupported a fair argument that the proposeddevelopment may have a significant effect on theenvironment. In particular, the court held that thenegative declaration did not adequately address GHGemissions from the project. On appeal, the appellatecourt affirmed, holding that the irrigation district hadstanding to maintain the action and that the evidence inthe record should not have been discounted by the cityabsent a credibility determination.

Northern Plains Resource Council v. MontanaBoard of Land Commissioners (Montana Dist. Ct.Feb. 3, 2012): A Montana state court dismissed achallenge to the Montana State Land Board’s decisionto lease access to 1.2 billion tons of coal without firstcomplying with the Montana Environmental Policy Act(MEPA). The plaintiffs argued that a state lawexempting coal leases from environmental review underMEPA violated the Montana Constitution. The courtdisagreed, holding that the exemption only delayed theenvironmental review until a more detailed mining planwas presented at the permitting stage.

Peters v. Honda (Cal. Small Claims Ct. Feb. 1,2012): A small claims court in California awarded theowner of a 2006 Honda Civic Hybrid $9,867 indamages regarding allegations that the company hadnegligently misled the owner concerning claims that thecar could achieve as much as 50 miles per gallon(mph). The plaintiff contended that her vehicle never

achieved the fuel economy of 51 mpg on highways and46 mpg in cities that Honda promoted, claiming thather car only achieved around 28 mpg. Under a fuel-economy testing procedure no longer used by EPA,the Civic Hybrid scored as high as 51 mpg onhighways. EPA, after revising its testing methods, ratedthe current Civic Hybrid at 44 mpg in both cities andhighways. Although several class action lawsuits havebeen filed on behalf of disgruntled owners of 2003-2009 Civic Hybrids, the plaintiff opted out of thesettlement classes.

Aronow v. Minnesota (Minn. Dist. Ct. Jan. 30,2012): Our Children’s Trust, an environmental groupbased in Oregon, filed a lawsuit in federal court andlawsuits in all fifty states asserting that the federalgovernment and state governments have an obligationunder the public trust doctrine to regulate GHGemissions. In Minnesota, the group commenced alawsuit against the governor and the MinnesotaPollution Control Agency, which moved to dismiss. Astate trial court granted the motion, holding first that thegovernor was not a proper party because he had nolegislative authority to implement the policies sought bythe plaintiff. Turning to the merits, the court held thatthat the public trust doctrine only applies to navigablewaters, not the atmosphere. In addition, the court heldthat the plaintiff had no viable claim under theMinnesota Environmental Rights Act given that he hadnot given the requisite notice and had not sued onbehalf of the state, as the statute required.

AES Corp. v. Steadfast Insurance Co. (Va. SupremeCt. Jan. 17, 2012): The Virginia Supreme Courtgranted a motion for a new hearing in a lawsuit inwhich the court previously held that an insurancecompany did not have a duty to defend an energycompany being sued for its alleged contribution toclimate change. In the motion, AES argued that thecourt’s decision was overly broad and could impair theadministration of insurance claims for negligence inVirginia.

Settlements

Conservation Law Foundation v. Dominion EnergyNew England (D. Mass, consent decree filed Feb. 3,2012): The owner of the Salem Harbor Power Station,

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one of the oldest and most heavily polluting powerplants in Massachusetts, agreed not to use coal at anynew generating units at the plant after the currentfacility shuts down in 2014. The consent decree alsorequires the company to provide $275,000 forsupplemental environmental projects designed toreduce air pollution in communities close to the plantand reduce demand for electricity in the region. Severalenvironmental groups filed the lawsuit in 2010, allegingthat the company had violated the Clean Air Act morethan 300 times in a five-year period.

New Cases and Court Filings

American Fuel & Petrochemical Manufacturers v.EPA (D.C. Cir., filed June 12, 2012): Two energyindustry groups filed a lawsuit challenging EPA’srenewable fuel standards, specifically the agency’sdecision to require refiners to blend fuel with ethanol orpay the agency for waiver credits. The lawsuit wasfiled after EPA denied a petition from the groupsseeking a waiver of the 2011 cellulosic fuelrequirements under the standard. According to thepetition, EPA’s data revealed that no cellulosic fuel wasavailable during 2011. The lawsuit alleges that thewaiver denial amounts to a hidden fuel tax toconsumers because it forced refiners to purchasecredits representing a fuel that was inaccessible. Indenying the petition, EPA said that the organizationshad ample opportunity to raise their arguments inresponse to the two notices of proposed rulemakingbut failed to do so.

Las Brisas Energy Center LLC v. EPA (D.C. Cir.,filed June 11, 2012); White Stallion Energy CenterLLC v. EPA (D.C. Cir., filed June 12, 2012);Sunflower Electric Power Co. v. EPA (D.C. Cir.,filed June 12, 2012); Utility Air Regulatory Group v.EPA (D.C. Cir., filed June 12, 2012); Tri-StateGeneration and Transmission Association v. EPA(D.C. Cir., filed June 12, 2012); CTS Corp. v. EPA(D.C. Cir., filed June 13, 2012); Power4Georgians v.EPA (D.C. Cir., filed June 12, 2012): Several powerplants and industry groups filed challenges to EPA’sproposed carbon dioxide (CO

2) emissions standards

for new power plants. Although EPA has not finalizedthe rule, the petitioners alleged that the rule constitutes

final agency action because new plants that beginconstruction after April 13, 2012, the date the rule wasproposed, would be subject to the CO

2 limit. The

proposed rule would set a CO2 emissions limit of

1,000 pounds per MW hour for all new power plants.

Utility Air Regulatory Group v. EPA (D.C. Cir., filedMar. 16, 2012): An industry group challenged EPA’smercury and air toxics standards for power plants. Inaddition to challenging the standards, the petitionchallenges EPA’s denial of a petition to remove electricutility steam generating units from the list of sourcecategories that are regulated under Section 112 of theCAA.

American Petroleum Institute v. EPA (D.C. Cir.,filed Mar. 9, 2012): The American Petroleum Institutefiled a lawsuit in the D.C. Circuit challenging EPA’srenewable fuel standards for 2012, alleging that therequirements are unachievable. EPA’s renewableenergy standards for 2012 require 8.865 milliongallons of cellulosic biofuel. The lawsuit alleges thatthese requirements are a “regulatory absurdity”because the fuel is not widely available and that theagency should set the requirement by looking at theprevious year’s actual production volume.

American Petroleum Institute v. EPA (D.C. Cir.,filed Feb. 21, 2012); American Gas Association v.EPA (D.C. Cir., filed Feb. 21, 2012): added to the“challenges to federal action” slide. Several oil andnatural gas industry groups filed a lawsuit in the D.C.Circuit challenging an EPA rule issued in December2011 requiring petroleum and gas drilling operations toreport 2011 GHG emissions from wells and storagetanks on a county level and by geologic formation.Among other things, the groups allege that the revisionsto EPA’s mandatory emissions reporting rule were notsubject to a notice-and-comment period before theywere finalized. The reporting rule requires old andnatural gas systems that emit at least 25,000 metrictons per year of CO

2-equivalent to collect data on their

emissions, with 2011 emissions due to EPA by March31, 2012.

Resisting Environmental Destruction on IndigenousLands v. EPA (9th Cir., filed Feb. 17, 2012): Several

11

environmental and Alaska Native groups filed an actionin the Ninth Circuit seeking to overturn two air qualitypermits issued by EPA to Shell for offshore Arcticdrilling operations. The permits allow a ship owned byShell and several support vessels to operate in both theChukchi Sea and the Beaufort Sea. According to thecomplaint, the authorizations are “major source”permits, which allow Shell to emit more than 250 tonsof pollutants annually and to adhere to the Clean AirAct’s prevention of significant deteriorationrequirements. Among other things, the plaintiffscontend that GHGs and back carbon from the shipswill accelerate the loss of snow and sea ice in theArctic, to the detriment of members of the AlaskaNative communities.

Coalition for a Safe Environment v. California AirResources Board (EPA, filed June 8, 2012):Environmental justice advocates filed a complaint withEPA alleging that California’s economy-wide GHGemissions cap-and-trade program violates Title VI ofthe Civil Rights Act of 1964 because it adverselyimpacts low-income and minority neighborhoods.Specifically, the groups contend that CARBdiscriminated against communities of color when itadopted the cap-and-trade program because theresidents of those neighborhoods will not benefit fromthe reduction in emissions the program is designed toachieve. At issue is the basic design of the tradingprogram, which allow emitters to reduce emissions orpurchase credits. Petitioners allege that allowingemitters to purchase credits does not result in emissionreductions in neighborhoods in and around industrialfacilities to reduce harmful air toxics that are emittedalong with carbon dioxide.

Dine Citizens Against Ruining Our Environment v.OSMRE (D. Col., filed May 15, 2012): Severalenvironmental groups filed a lawsuit in Coloradofederal court alleging that the federal government didnot analyze the overall environmental impact inapproving a coal mine expansion permit in NewMexico. The mine at issue is the sole source of coal forthe Four Corners Power Plant on the Navajo tribalreservation. The plant is the largest source of nitrogenoxide emissions nationwide.

Shell Gulf of Mexico, Inc. v. Center for BiologicalDiversity (D. Alaska, filed May 2, 2012): Shell Oilfiled a lawsuit in Alaska federal court seeking adeclaration that the National Oceanic and AtmosphericAdministration (NOAA) and the National MarineFisheries Service (NMFS) properly issued it an“incidental harassment authorization” in connection withits oil exploration activities in the Chukchi and BeaufortSeas. The complaint alleges that the Center forBiological Diversity and seven other environmentalorganization have sought to prevent the company fromdrilling on the Alaska Outer Continental Shelf “by anymeans necessary” and that it is a “virtual certainty” thatthese groups will litigate the approvals of thisauthorization.

WildEarth Guardians v. Bureau of LandManagement (D.D.C., filed May 2, 2012): Anenvironmental nonprofit group filed a lawsuit againstBLM alleging that the agency’s authorization of fourlarge coal leases in the Power River Basin without fullyanalyzing the climate change impacts of increased CO

2

emissions in violation of NEPA. According to thecomplaint, collectively, the four leases have thepotential to produce more than 1.8 billion tons of coal,resulting in over three billion metric tons ofCO

2emissions.

Sierra Club v. Energy Future Holdings Corp. (W.D.Texas, filed May 1, 2012): The Sierra Club filed alawsuit against a coal-fired power plant near Waco,Texas, alleging that the plant violated particulatestandards thousands of times over a four-year periodin violation of Texas state law. The lawsuit alleges thatthe plant violated the opacity limit in the Texas StateImplementation Plan and the emissions limit in itsoperating permit. The Sierra Club alleges that betweenJuly 2007 and December 2010, the plant’s two unitsviolated the opacity limit more than 6,500 times.

Dine CARE v. EPA (D.D.C., filed Mar. 19, 2012):The National Parks Conservation Association and aNavajo tribal environmental group filed a lawsuitalleging that EPA failed to require modern pollutioncontrols for two power plants in Arizona. Thecomplaint alleges that EPA should have issued federalimplementation plans establishing best available retrofit

12

technology (BART) for the plants. The complaintalleges that the agency issued a proposed BARTdetermination for one of the plants in 2010 but neverissued a final determination and that it never issued aproposed or final determination for the other plant.

Shell Gulf of Mexico, Inc. v. Greenpeace (D.Alaska, filed Feb. 27, 2012): Shell filed a lawsuit infederal district court in Alaska seeking to blockenvironmental activists from barricading or occupyingits drilling ship bound for the Arctic. The companyalleged that Greenpeace members unlawfully boardedits ship in New Zealand and chained themselves todrilling equipment in an attempt to stop the ship fromreaching the Chukchi Sea. In its complaint, thecompany alleges causes for action for, among otherthings, nuisance, piracy, malicious mischief on the highseas, tortious interference with contractual relations,trespass, false imprisonment, and recklessendangerment.

In re Regional Greenhouse Gas Initiative (N.J.Super. Ct., filed June 6, 2012): Two environmentaladvocacy groups filed a lawsuit in New Jersey statecourt, alleging that the state’s withdrawal from RGGIviolated state procedural requirements for regulatoryactions. In particular, the plaintiffs alleged that thestate’s action ignored the public notice-and-commentrequirements of the New Jersey AdministrativeProcedure Act. In May 2011, New Jersey GovernorChris Christie announced that the state would terminateits participation in RGGI at the end of 2011, statingthat the program was not effective in cutting emissionsof C0

2 and had contributed to higher energy prices.

Dominion Cove Point LLC v. Sierra Club (Md. Cir.Ct., filed May 18, 2012): An energy company sought adeclaratory judgment that an agreement between it andthe Sierra Club pertaining to a liquefied natural gas(LNG) terminal allows it to convert the terminal into aLNG export facility. Specifically, the lawsuit seeks adeclaratory judgment that the Sierra Club’s effort toblock the conversion has no basis under theagreement. Under a series of agreements between thetwo parties, major changes to the terminal andadjacent areas cannot be made without theenvironmental group’s approval.

Citizens Climate Lobby v. California Air ResourcesBoard (Cal. Super. Ct., filed Mar. 28, 2012): Severalcitizens’ groups filed a lawsuit against the California AirResources Board (CARB), alleging that its C0

2 offset

regulations violate AB 32, otherwise known as theCalifornia Global Warming Solutions Act. The lawsuitalleges that the offset protocols allow nonadditionalcredits to qualify as offsets, that CARB’s definitions for“conservative” and “business-as-usual” have thepotential to be interpreted in more than one way, thatthe regulations themselves are not enforceable, and thatthe provisions violate AB 32’s integrity standards.

Sierra Club v. County of Riverside (Cal. Super. Ct.,filed Mar. 7, 2012): Sierra Club and the Center forBiological Diversity filed a lawsuit challenging a large,mixed-use development planned for the shores of theSalton Sea in California. The lawsuit alleges thatRiverside County’s Board of Supervisors failed toadequately analyze the project’s GHG emissions,among other things. According to the complaint, theproject, if completed, would involve 16,665 residentialunits and more than 5 million square feet of commercialspace on 4,918 acres. It would take thirty-five years tocomplete all five phases. Among other things, thecomplaint alleges that residents of the project will beforced to drive long distances for jobs and basicservices, which will result in increased air pollution andGHG emissions.

Koch v. Cato Institute (Johnson Co. Dist. Ct., filedMar. 2, 2012): The Koch brothers, billionaires whohave funded a variety of groups that oppose efforts toregulate GHG emissions, filed a lawsuit concerning theownership of the Cato Institute, a libertarian think tankfounded by the brothers. The Koch brothers own 50percent of the shares of the Institute. The lawsuitcontends that 25 percent of the remaining shares of theInstitute were owned by William Niskanen, who diedin 2011, and that these shares should have been soldback to the Institute upon his death pursuant toshareholders’ agreements.

Barnett v. Chicago Climate Futures Exchange LLC(Cook Co. Cir. Ct., filed Dec. 16, 2011): The founderof the Chicago Climate Futures Exchange, which isscheduled to close in 2012, was sued in Illinois state

13

court for alleged fraud in luring two dozen individualsand companies into buying privileges with theenvironmental derivatives market. The plaintiffs allegethat founder Richard Sandor and other agents with theExchange falsely represented that only 250 tradingprivileges on the Exchange would be sold, after whichtheir holders would be able to transfer or lease them.According to the complaint, the plaintiffs paid between$5,000 and $120,000 for trading privileges.

Independent Energy Producers Association v.County of Riverside (Cal. Superior Ct., filed Feb. 3,2012): Several groups representing solar power plantdevelopers filed a lawsuit challenging a $450 per acreannual fee on utility-scale solar projects by RiversideCounty, California. The county says that the fee isnecessary to defray the costs of impacts and servicesrelated to the development of the facilities. Theplaintiffs allege that the fee is an illegal tax and alsoviolates the California Mitigation Fee Act.

Cullen Howe is an environmental law specialist inArnold & Porter’s environmental practice group,where he focuses on climate change, greenbuildings, and other environmental issues.

UpcomingSectionPrograms—

For full details,please visit

www.ambar.org/EnvironCalendar

August 2-7, 2012ABA Annual MeetingChicago, IL

September 20-21, 2012Clean Water Act: Law and RegulationPrimary Sponsor: ALI CLEWashington, DC

October 10-13, 201220th Section Fall MeetingAustin, TX

February 26, 2013Key Environmental Issues in US EPARegion 4Atlanta, GA

March 21-23, 201342nd Annual Conference onEnvironmental LawGrand America HotelSalt Lake City, UT

April 18, 2013ABA Public Land and Resources LawSymposiumUniversity of Montana Law SchoolMissoula, MT

Past program materials and podcasts areavailable for purchase.For current tree planting events or

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The Section has undertaken afive-year project with the goal ofplanting a million trees by 2014.

14

INTRODUCTION TO CALIFORNIA’SCAP-AND-TRADE PROGRAM

Dallas Burtraw, David McLaughlin, andSarah Jo Szambelan

California’s cap-and-trade program for carbon dioxide(CO

2) emissions will come into effect in January 2013.

We seek to demystify the regulation by revisiting itsevolution, design, value and legal context. The programwas developed with extensive stakeholder consultationand economic analysis and is a part of a largeremissions-reductions strategy where the majority ofemission reductions occur through sector-specificregulations. The design of the trading program, whichbuilds on the success of several past cap-and-tradeprograms, is intended to capture low-costopportunities for emissions reductions that might bemissed by regulations. The most significant legal issuewith respect to cap and trade is likely the use revenuegenerated from the auction of allowances, an issue thatshould be of interest to all Californians in the comingmonths.

Motivated to avoid the potential damages climatedisruption could bring to the economy, public health,natural resources, and the environment, Californiaenacted the Global Warming Solutions Act of 2006(AB 32). This legislation set the nation’s first legallybinding target on climate-disrupting GHG emissions,including CO

2. AB 32 was passed by a substantial

majority in both houses of the California legislature(Assembly 47–32 and Senate 23–14), and signed intolaw by Governor Schwarzenegger on September 27,2006.

The progression from the passage of AB 32 to theimplementation of the cap-and-trade program has beenmarked by groundbreaking policy design and intensivestakeholder process. The law places the California AirResources Board (CARB) in a lead technical role forimplementation. In December 2007, CARB approvedboth a 2020 emissions goal of 427 million metric tonsof carbon dioxide equivalents (MMT CO

2e) and a

regulation requiring larger industrial sources to reportand verify GHG emissions. In October 2010, forecastemissions were updated to 507 MMT CO

2e for 2020

in the absence of regulation; therefore, the law requiresan emissions reduction of 80 MMT CO2e to meet theemissions goal.

CARB held four public workshops and six technicalstakeholder work group meetings between November2007 and June 2008 to allow discussion of proposedactions to reduce GHG emissions and to solicitfeedback on elements of program design. This processled to the draft Scoping Plan in June 2008, whichproposed a suite of emissions-reduction policies,including energy efficiency and conservation measures,a low-carbon fuel standard, and a renewable portfoliostandard for electricity generation. The Scoping Plan,which was subject to additional iterations of publiccomment and stakeholder workshops, was approvedin October 2008. It was reapproved in August 2011following a mandatory economic and environmentalimpact analysis required under CaliforniaEnvironmental Quality Act (CEQA).

The final Scoping Plan includes dozens of measuresexpected to contribute to the emissions-reductions goalset in AB 32. CARB, other state agencies, and thelegislature have been involved in drafting regulations toimplement and enforce some of those measures. Forexample, Senate Bill 2x1 was approved by theCalifornia legislature by a substantial majority in 2011and mandates that 33 percent of electricity sold inCalifornia be generated from renewable sources.Together with the preexisting 20 percent renewablegoal, these programs are expected to achieve 23.4 ofthe 80 MMTCO

2e target set in AB 32.

CARB also developed the Advanced Clean CarStandards (also called Pavley II after the Californiasenator and former assembly member who sponsoredthis and earlier emissions standards for passengervehicles sold in California). These standards set newemissions, durability, and fuel-economy standards forpassenger vehicles with model years 2017–2025,increase production of zero-emissions vehicles, andrequire alternative fuel stations. CARB estimates thattogether with previously approved clean car standards(Pavley I), the new standards will reap 31.7 MMTCO

2e in reductions by 2020.

15

Another complementary measure is the low-carbonfuel standard, which mandates that the carbon contentof fuels decrease by 10 percent by 2020 (a goaloutlined by Governor Schwarzenegger in ExecutiveOrder S-01-07). Its estimated emissions reduction is15 MMT CO

2e in 2020.

With other prescriptive measures in place or inprocess, in October 2010 CARB released for publiccomment the Proposed Regulation Order and InitialStatement of Reasons that laid out the initial structureand design choices underlying the cap-and-tradeprogram. After a year-long development processinvolving further public hearings, the cap-and-traderegulation was filed with the Office of AdministrativeLaw in October 2011 and approved in December2011.Cap and trade should therefore be understood as oneof many measures in the Scoping Plan to achieve thereduction goal of 80 MMTCO

2e by 2020. Sixty-two

MMTCO2e are expected to come from the measures

identified for specific sectors that are alreadyunderway. Additional regulatory measures that wouldachieve the goal were possible, but the logic of turningto cap and trade relies on the presumption that givenproper incentives, private actors could identifyopportunities to achieve the remaining necessaryemissions reductions at a lower cost. The cap-and-trade program essentially came last in the list ofmeasures to ensure that no low-cost emissionreductions efforts would be left behind. Roughly 18MMTCO

2e of additional reductions are expected to

be harvested by cap and trade.

Cap-and-trade design

Cap and trade has two parts. The first is the emissionscap, which limits overall emissions that can occur atregulated facilities. To emit one unit of pollution into theatmosphere, a facility must surrender one allowance oran offset credit (equivalent to one metric ton of CO

2).

The number of available allowances plus someallowances held in reserve equals the total emissionscap. The second part is the opportunity allowed eachfacility to buy or sell emissions allowances to complywith the program (in addition to simply reducingemissions).

The cap-and-trade program covers 85 percent ofGHG sources within California. (The remaining 15percent are made up of GHG emissions from diffusesources such as agriculture and are addressed by othermeasures in the Scoping Plan.) In its first phase (2013–2015), the program covers just the electricity andindustry sectors, expanding to include transportationfuels and natural gas in 2015.

The program begins with an annual cap of 163 millionallowances in 2013 for the industry and electricitysectors, which are forecast to emit 167 MMTCO

2e

under business-as-usual (BAU) projections. In 2015,the cap increases to 395 million allowances to includedistributors of transportation fuels, natural gas, andother fuels, compared to a BAU projection of 407MMTCO

2e. After 2015 the cap declines, arriving at

334.2 million allowances in 2020, when BAU forecastemissions are 409 MMTCO

2e. Covered sources will

reduce emissions by 74.8 MMTCO2e by 2020, which

when combined with reductions from other ScopingPlan measures will enable California to meet the 80MMTCO

2e reduction target set in AB32.

Initially, some emissions allowances will be allocated tofirms and some will be auctioned. The first auction willbe held on November 14, 2012. Beginning in 2013,quarterly auctions are expected in February, May,August, and September. The auction has a uniform-price, sealed-bid format. Bids are submitted inadvance (sealed-bid). Allowances will be given first tothe highest bid and in declining order by bid untilsupply is exhausted. The lowest bid to win anallowance establishes the price paid by all winning bids(uniform-price). To mitigate unanticipated increases inprices, allowances will be made available from anallowance reserve if prices reach plateaus of $40, $45,and $50, with those values rising over time. Theauction will have a reserve price (minimum acceptablebid) initially set at $10 per ton and increasing over timeto establish a minimum price for allowances. The use ofan auction is an improvement over many other cap-and-trade programs and builds on the successfulexperience in the Northeast states’ program thatgoverns emissions from the power sector.

16

Cap and trade has repeatedly proven effective in manycontexts saving businesses and consumers billions ofdollars. Most famously, the first broad application ofcap and trade was for reduction of sulfur dioxideemissions nationally from the electric power industry.That program, part of the 1990 Clean Air Actamendments, reduced emissions roughly by half, at apace faster than anticipated and at costs that were atleast 40 percent below forecasts.

A second successful program of comparablemagnitude covered emissions of nitrogen oxides innineteen northeastern states. Indeed many regionalprograms have addressed other pollutants such asvolatile organic compounds, but the largest program todate involves twenty-seven countries in the EuropeanEmissions Trading System. Like the first phase of theCalifornia program, it is aimed at large reductions ofCO

2 across the electricity and industrial sectors. New

Zealand also has implemented an economywide cap-and-trade program, which covers all GHGs. A regionalcap-and-trade program for CO

2 involving nine

northeast U.S. states has been in place since 2009 andgenerated nearly a billion dollars that have beenreinvested in efficiency programs in the region. Newprograms have achieved legislative approval inAustralia, South Korea, and Mexico. The success ofcap and trade has been almost universal, wheresuccess is measured by the attainment of an emissions-reductions goal at costs that are lower than they wouldbe with prescriptive regulations.

Finding emissions-reduction opportunities throughoutthe economy is enormously complex and, whileespecially challenging under prescriptive regulation,plays to the strength of cap and trade. Markets helpuncover emissions-reduction opportunities, and this isprecisely why California chose market-basedmechanisms to complement other regulatory measuresand standards.

Allowance value will be substantial

Emissions allowances have value because theemissions cap limits their number. The price emittersare willing to pay to purchase allowances determinestheir market value. This price will increase the cost of

energy and other goods and services under cap andtrade. The allowance value generated through thesehigher prices is paid primarily by consumers and tosome degree by businesses who participate in theCalifornia economy. However, the allowance valuegenerated by the trading of emissions allowances doesnot disappear—this value will cycle through theeconomy.

In the electricity sector, the California Public UtilitiesCommission (CPUC) will decide how to use the valueassigned to investor-owned utilities, and similargoverning bodies will decide how to use the valueassigned to publicly owned utilities. The electricitysector receives a direct allocation of 96 millionallowances in 2013, declining to 83 million in 2020.The investor-owned utilities must liquidate their shareof allowances through the general auction. InDecember 2010, CARB issued Resolution 10-42instructing the Executive Officer to work with theCPUC to direct the allowance value from theallocation to electric utilities to the benefit of residential,commercial, and industrial ratepayers. A similarrequirement is imposed on publicly owned utilities,although they can use their allowances for complianceand do not have to liquidate them.

An important consideration in the design of theprogram has to do with the potential adverse impact ofcap and trade on energy-intensive, trade-exposedindustries. To safeguard against these potentialoutcomes, free allowances are allocated to protectjobs in vulnerable industries unable to recoupcompliance costs or that face out-of-state competition.In total, this direct allocation begins at roughly 60million allowances in 2013 and declines over time. Thisallocation is intended to protect against such industriesfrom moving out of the state and taking their emissionswith them. CARB determines the allocation ofallowances to each industry using current and historicalindustrial production multiplied by an industry-specificassistance factor, which accounts for the emissionsintensity and trade exposure of an industry, and byproduct-based emissions efficiency benchmarks, whichprovide more allowances to more efficient firms.As the program enters the second and thirdcompliance periods, the industrial assistance factor for

17

industries with medium and low emissions intensity andtrade-exposure risk will decline. This decline will resultin fewer freely allocated allowances to these industriesand in additional sales of allowances through thequarterly auctions.

From November 2012 through 2014, most of theallowances sold in auction will be the sale of vintage2015 and later allowances that can be used forcompliance in future years. In 2015 the size of theauction will expand five-fold when transportationenters the program. The state legislature will finalize thedecision on how to use the billions in revenue from theauction.

Public support and legal context of cap andtrade in California

The most recent confirmation of public support for AB32 and the Scoping Plan was the rejection of theCalifornia Jobs Initiative (Proposition 23), an attemptto suspend AB 32 and place the Scoping Planmeasures on hold until unemployment in the state was5.5 percent or below for four consecutive quarters.Proposition 23 was struck down with 61.6 percent ofthe vote on November 2, 2010.

Currently, the central legal issue for the cap-and-tradeprogram hinges on how the allowance value from theprogram is defined and used. If allowance value isdefined to be a tax or if the proceeds are not used toreduce emissions, then the cap-and-trade programwould be at risk.

In their recent paper, “California’s Cap and TradeAuction Proceeds: Taxes, Fees or Something Else?”Lambe and Farber (UC Berkeley Center for Law,Energy & the Environment 2012) examine the legaluses of auction revenue given strict California policieson the imposition of “taxes.” In 1978, California voterspassed Proposition 13, placing restrictions on howmuch property tax, assessments, state tax, and localtax can increase. Proposition 13 also requires that anychange in state taxes with the purpose of increasingrevenue must be passed by a two-thirds majority in thelegislature, a test that AB32 would not pass.

In contrast, if revenues are considered “fees” then therelevant framework is a 1997 ruling, Sinclair PaintCompany versus the State Board of Equalization, inwhich the California Supreme Court established theneed for a clear link (“nexus”) between the activity onwhich a fee is levied and the way any resultingrevenues are used. The allowance value stems frompollution, so the nexus test implies that allowancevalue, including revenues from an auction, must beused for a purpose related to that pollution such asfinancing of additional emissions reductions. The intentof AB 32 is somewhat broader, calling also protectionof vulnerable communities from the costs the policy.The authors argue (citing Horowitz et al 2011, “Rulesof the Game: Examining Market Manipulation, Gamingand Enforcement in California’s Cap-and-TradeProgram” UCLA School of Law Research Paper No.12-14) that revenues from an auction can thereforeprobably be used to achieve these goals in a portfoliobalanced to reflect the relative goals of AB32.However, directing revenue to the general fund fornew, unrelated programs to reduce marginal tax ratesor make payments to households appears to beprecluded without further legislative action.

One legal issue relevant to cap and trade, but notdirectly part of the program, is the challenge to thelow-carbon fuel standard (a topic addressed in earlierissues of this newsletter). Court proceedings areaddressing whether the standard violates thecommerce clause as it assigns a higher carbon intensitylevel to out-of-state ethanol than to in-state ethanol.CARB continues to develop and enforce the programwhile the case is on appeal.

What happens next in California’s cap-and-trade program?

Some key remaining decisions concern thedevelopment of additional protocols for offsets,potential linkage of the program with a similar cap-and-trade program in Quebec, and legal decisionsabout the status of the low-carbon fuel standard.However, the most important decisions concern theuse of allowance value created under the program.

18

Estimates of the allowance value generated by theprogram in the first year alone range from roughly $2.6to $7.8 billion and will grow over time. Revenues fromthe portion of allowances sold in the auction will rangeinitially from roughly $0.6 to $1.8 billion and growsubstantially when transportation fuel and natural gasdistributors are added to the program in 2015.Decisions on how allowance value can and should beused are scheduled to be finalized over the next fewmonths.

Generally speaking, the allowance value created underthe program is dedicated to three purposes. Theportion associated with electricity-related emissionswill go to the investor- or publicly owned utilities andbe directed to the benefit of ratepayers. Decisionsabout how this occurs will be made by the CPUC forthe investor-owned utilities by June of 2012 and by thegoverning boards for the publicly owned utilitiessometime this year.

The second portion is allocated for free to industry,contingent on industry maintaining jobs and economicactivity in the state. If a firm reduces its activity in thestate, then its allocation is reduced in the future.California households could benefit from this allocationif it prevents jobs from leaving the state. But, if the freeallocation is too generous, it could lead to windfallprofits for industry. CARB will be responsible forevaluating this issue over time.

The third portion is the revenue generated fromauctioning allowances that will accrue in the Air

Pollution Control Fund. In the next fiscal year,revenues in the fund will amount to $0.6 to $1.8 billion.The legislature is likely to authorize that some or all ofthese revenues be used to pay for the cost of programsassociated with the implementation of AB 32. But by2015, when natural gas and transportation fueldistributors enter the program, the amount of revenuefrom the auction will grow five-fold. In the long run, thelargest effect on households will hinge on the decisionabout how to use these revenues. Decisionssurrounding the use of these revenues are likely toattract major legal and legislative interest goingforward.

Dallas Burtraw is a Senior Fellow and DariusGaskins Chair at Resources for the Future.Burtraw’s research includes the design ofenvironmental regulation, the costs and benefits ofenvironmental regulation, and the regulation of theelectricity industry.

David McLaughlin received his B.S. inEnvironmental Science and Policy in 2004 from theUniversity of Maryland before working atResources for the Future. While at Resources forthe Future he received a M.P.P. from GeorgeWashington University. He recently joined TheBrattle Group in February 2012.

Sarah Jo Szambelan received her B.S. inEnvironmental Economics and Policy from UCBerkeley and served as a researcher at Resourcesfor the Future for three years.

@ABAEnvLaw

19

RECENT CONTROVERSY AND LITIGATIONCONCERNING PROPERTY ASSESSEDCLEAN ENERGY (PACE) FINANCING

J. Cullen Howe

Background and Development of PACEFinancing Legislation

In the last several years, a number of states andmunicipalities have enacted legislation that authorizesthe creation of finance programs, typically through thesale of municipal bonds, that allow residential buildingowners to make energy efficiency improvements and/or install renewable energy systems. These programsare referred to as Property Assessed Clean Energy, orPACE.

PACE programs attempt to solve the up-front costproblem typical of energy efficiency improvements byallowing residential building owners to finance the costat a low interest rate. The property owners then repaytheir loans over 15–20 years via an annual assessmenton their property tax bill. PACE also solves anotherproblem—recovering the investment before a propertyis sold. Property owners are unlikely to invest inrenewable energy systems or energy efficiencyimprovements if they plan to sell the property beforethe investment is recouped. PACE liens “run with theland,” meaning that if the loan is not fully paid offbefore the property is sold, the remaining paymentobligation passes to the purchaser.

In recent years, twenty-seven states and severalmunicipalities have enacted PACE laws. Statestypically have limitations on what can and cannot beincluded in property taxes. Thus, most states that havepassed PACE legislation have enacted laws that, ineffect, allow municipal PACE loan programs toincrease property taxes for participating homeowners.These laws are referred to as enabling legislation. Forexample, in 2009, New York enacted a law thatauthorizes municipalities, by drawing on federalAmerican Recovery and Reinvestment Act (ARRA)funds set aside for this purpose, to create financeprograms for building owners for the installation ofrenewable energy systems and energy efficiencyimprovements. Under the law, loans are only made for

energy efficient improvements that are deemedappropriate by an energy audit and for renewableenergy systems that are determined to be appropriateand cost effective through a feasibility study. Like otherPACE laws, the loan made under the PACE programsbecome a lien on the property benefitted by the loan.

Other states have enacted similar laws. For example, inSeptember 2008, California enacted a law (A.B. 811)that authorizes PACE financing. In October 2010,California enacted another law (A.B. 1873) that allowsthe state treasurer, the California Public EmployeesRetirement System, and the State CompensationInsurance Fund to invest in PACE bonds. Allowingthese three large California funds to invest in suchbonds could potentially reduce the interest ratestypically charged with PACE financing. Similarly, inApril 2010, Maine enacted a law that authorizedmunicipalities to adopt PACE programs.

Federal Mortgage Regulators Balk at SeniorPosition of PACE Liens

A key component of a PACE lien is that, like other taxliens, it is senior to any mortgage on the property,meaning that it must be repaid first if the property goesinto default. On May 5, 2010, Fannie Mae andFreddie Mac, government entities that guarantee morethan half of the residential mortgages in the UnitedStates, issued letters to mortgage lenders stating thatthese liens could not take priority over a mortgagefinanced by either entity. In July 2010, the Director ofthe Federal Housing Finance Agency (FHFA) (thefederal agency that regulates Fannie Mae and FreddieMac) issued a statement that PACE financing wouldincrease homeowner debt burdens and “could create agreater potential for the loss of a home through a taxsale or foreclosure if the consumer cannot meet theextra debt burden.” The statement concluded that firstliens created by PACE programs were different thanroutine tax assessments and posed significant risks tolenders, servicers, and mortgage securities holders.The statement called for a pause in the programs sothese concerns could be addressed and directedFannie Mae and Freddie Mac to undertake “prudentialactions,” including reviewing their collateral policies toassure no adverse impact by PACE programs.

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Following FHFA’s statement, in August 2010, FannieMae and Freddie Mac announced to lenders that theywould not purchase mortgages originated on or afterJuly 6, 2010 (the date of the statement) that weresecured by properties encumbered by a PACE lien.The net result of these actions has been that virtually allPACE programs across the country have been put onhold or discontinued.

In an attempt to revive PACE programs, in July 2011 abipartisan group of Representatives introduced H.R.2599, The PACE Assessment Protection Act of 2011.The bill establishes uniform lending requirements forPACE loans in communities that choose to fund PACEprograms and prohibits FHFA (as well as Fannie Maeand Freddie Mac) from refusing to purchasemortgages or otherwise adopt stricter underwritingpolicies concerning properties with PACE liens. Thebill attempts to address FHFA’s concerns byestablishing the following requirements for any suchprogram: (1) property owners seeking PACE fundingmust obtain written authorization from the holders ofthe first mortgage on their property; (2) an applicant’sproperty tax payments must have been current forthree years or the property owner’s period ofownership, whichever is shorter; (3) the property canhave no involuntary liens over $1,000 and no noticesof default; (4) applicants can have no bankruptcy filingsover the previous seven years, and mortgage paymentsmust be current; (5) the property will be subject to anaudit and a feasibility study by a Building PerformanceInstitute auditor, a Home Energy Rating System(HERS) rater, or auditor commissioned by applicablegoverning entity; (6) financing terms must require thatthe total energy savings expected exceed the cost ofwork done; (7) the total amount of the assessmentcannot exceed 10 percent of the estimated value of theproperty; (8) the homeowner has to have equity in theproperty equal to or greater than 15 percent of its totalestimated value; and (9) the financing term cannot bemore than twenty years. Currently, this bill remains inthe House Committee on Financial Services.

Litigation Concerning FHFA’s Refusal toPurchase Mortgages With PACE Liens

Following Fannie Mae’s and Freddie Mac’s refusal topurchase mortgages secured by PACE liens, severallawsuits were filed. A summary of each follows.

Town of Babylon v. Federal Housing FinanceAgency: One lawsuit was filed by the Town ofBabylon in the Eastern District of New York againstFHFA, Fannie Mae, Freddie Mac, and several otherrelated parties. Babylon established one of the firstPACE programs in the country in 2008 with its LongIsland Green Homes Program. In its complaint,Babylon asserted that the typical cost of a PACEimprovement was less than $9,000 and that reducedenergy costs typically exceeded the homeowners’monthly repayment obligations, which averaged lessthan $92. Babylon further asserted that there had neverbeen a single default on a PACE-financed repaymentobligation. The lawsuit alleged that FHFA, in issuing itsJuly 2010 statement, violated the AdministrativeProcedure Act (APA) by not publishing the statementas a rule and doing so via a notice-and-commentperiod and violated the National Environmental PolicyAct (NEPA) by failing to issue an environmental impactstatement. FHFA subsequently moved to dismiss thelawsuit on standing grounds. In particular, FHFAargued that in issuing the July 2010 statement it wasacting in its rule as conservator of Fannie Mae andFreddie Mac and as such the court was devoid ofjurisdiction under 12 U.S.C. § 4617(f). This statutorysection was included as part of The Housing andEconomic Recovery Act of 2008, which adoptedprovisions intended to address the severe downturn inthe housing market. The section authorizesappointment of the FHFA as conservator or receiver ofa regulated entity under certain circumstances andlimits judicial review of such actions. In particular, thesection includes an explicit limitation on a court’s abilityto review actions of FHFA in its capacity as aconservator by stating that a court may not “take anyaction to restrain or affect the exercise of powers orfunctions of [FHFA] as a conservator or a receiver.”FHFA also argued that its July 2010 statement was nota final agency action and thus was not subject tojudicial review.

In June 2011, the district court granted the motion,holding that FHFA’s argument that § 4617(f) divestedthe court of jurisdiction was dispositive, rejecting theTown’s contention that FHFA was acting as a regulatorof Fannie Mae and Freddie Mac rather than aconservator. In doing so, the court noted that it was“unwilling, and indeed, cannot imagine how, it would

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venture to parse certain actions as regulatory in nature,and others pursuant to FHFA’s duties as conservator.”

Natural Resources Defense Council v. FederalHousing Finance Agency: Another lawsuit was filedin the Southern District of New York by the NaturalResources Defense Council (NRDC) against FHFA,also alleging violations of the APA and NEPA. FHFAmoved to dismiss on identical grounds, namely thatNRDC did not have standing to sue. In a June 2011decision, the district court granted the motion. Thecourt held that NRDC was unable to establishredressability given that it could not demonstrate that awithdrawal of the July 2010 statement would redressits alleged injuries given that banks would still be freeto refuse to grant mortgages to properties encumberedby PACE mortgages. The court further held that §4617(f) divested it of jurisdiction.

Leon County, Florida v. Federal HousingFinance Agency: A third lawsuit was filed by LeonCounty, Florida, against FHFA and related entities. In2010, Leon County created the Leon County EnergyImprovement District to operate a PACE programreferred to as the Leon County Energy AssistanceProgram, or “LEAP.” After FHFA restricted FannieMae and Freddie Mac from acquiring mortgages thatwere subordinate to PACE liens issued by LEAP, itfiled suit, alleging violations of the APA, the TenthAmendment, and the Florida Deceptive and UnfairTrade Practices Act. The defendants moved to dismiss.Like the previous two cases, the district court grantedthe motion, holding that § 4617(f) divested it ofjurisdiction. In its decision, the court noted that, asconservator, the FHFA has the statutory power to takesuch action as may be necessary to put the regulatedentity in a sound and solvent condition and appropriateto carry on the business of the regulated entity andpreserve and conserve the assets and property of theregulated entity, powers that were “easily broadenough” to include restricting Fannie Mae and FreddieMac’s ability to purchase PACE-encumberedmortgages.

California v. Federal Housing Finance Agency: Afourth lawsuit was filed by the State of California,several California counties and municipalities, and theSierra Club in the Northern District of California,

alleging violations of the APA, NEPA, and variousstate laws. One of the plaintiffs, Sonoma County, alsomoved for a preliminary injunction requiring FHFA toinstitute a notice-and-comment period concerning itsJuly 2010 letter. The defendants moved to dismiss onvarious grounds. In August 2011, the district courtissued a potentially wide ranging decision partiallydenying the motion to dismiss.

In its decision, the court first addressed whether theplaintiffs had Article III standing. The United States,although officially not a party to the lawsuit, raised thisissue in its Statement of Interest, alleging that plaintiffscould not satisfy the causation requirement becauseFreddie Mac and Fannie Mae took the position thatPACE debt obligations were incompatible with theiruniform security instruments before FHFA issued itsJuly 2010 statement and because it was merelyspeculation that if FHFA changed its policy individualswould be able to obtain PACE mortgages. The courtdisagreed, finding that FHFA had previously publicizedits concerns in a June 2009 letter, leading to FannieMae and Freddie Mac’s actions. In addition, the courtfound that plaintiffs’ alleged injuries were sufficientlyconnected to FHFA’s actions.

The court next turned to whether § 4617(f) and twoother statutory sections precluded judicial review of theagencies’ actions. With respect to § 4617(f), andunlike the previous three cases that addressed thisissue, the court found that FHFA was not acting as aconservator or receiver when it issued its July 2010statement and held that FHFA’s directions to FannieMae and Freddie Mac to prospectively refrain frompurchasing any mortgages that were subordinate toPACE liens amounted to substantive rulemaking thatwas distinct from its role as a conservator.

The second section describes supervisory actions thatFHFA may take concerning “significantlyundercapitalized” regulated entities, and exempts theseactions from judicial review. The court found thatFHFA did not impose such a designation on eitherFannie Mae or Freddie Mac and thus the section didnot apply. The third section bars judicial review of theissuance or enforcement of any notice or order issuedby FHFA. The court rejected this section as well,finding that the July 2010 statement did not amount to

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an order requiring the disposal or acquisition of anyasset.

With jurisdiction and standing established, the courtturned to plaintiffs’ first claim—that FHFA’s policystatements regarding PACE obligations failed tocomply with the notice-and-comment requirements ofthe APA and thus its actions were arbitrary andcapricious. The court concluded that the July 2010statement amounted to a final agency action and that,as such, it was subject to the APA’s requirements fornotice and comment. The court also found that theagency’s action was not subject to a discretionary actexemption from judicial review. It thus declined todismiss the APA claim.

The court turned next to the second claim—that FHFAviolated NEPA by failing to consider the environmentalimpact of its actions by preparing an environmentalimpact statement (EIS). Defendants alleged that theJuly 2010 statement did not amount to a “major federalaction significantly altering the quality of the humanenvironment” such that the preparation of an EIS wasrequired. The court disagreed, finding that plaintiffsadequately alleged that FHFA’s policy significantlyimpacted the environment by depriving California andits citizens of opportunities to improve water andenergy conservation. The court also rejected FHFA’sargument that it was statutorily precluded from alteringits determinations based on environmental concerns,holding that these dual concerns were not mutuallyexclusive and there was no categorical bar to FHFA’sauthority to consider environmental impacts in thisinstance.

The court did grant defendants’ motion allegingviolations of the Tenth Amendment because ofinterference with a county’s taxation and spendingpowers, holding that Congress was well within itsauthority to do this where the enactment is a properexercise of its constitutional authority. The court alsogranted the motion with respect to alleged violations ofthe Constitution’s Spending Clause for placingconditions on PACE programs without clearauthorization from Congress to do so, holding thatFHFA’s statement did not impose any terms for statesand counties to receive federal funds to support their

PACE programs. The court also dismissed the statelaw claims, holding that they were preempted byfederal law.

Finally and significantly, the court granted the plaintiffs’request for a preliminary injunction requiring FHFA,without changing its current policy, to proceed with thenotice-and-comment process concerning its policy onPACE-related debts.

Notwithstanding the above litigation, Fannie Mae andFreddie Mac’s reluctance to provide mortgages forproperties with PACE liens has put the program’sfuture in doubt. As of June 2012, it is unclear whetherthe PACE Assessment Protection Act will be passedby Congress, and many states that financed theirprograms through stimulus funds are suspending orwithdrawing their programs because of the deadlinesinvolved with applying for these grants.

However, the decision by the court in California v.Federal Housing Finance Agency marks the firsttime a lawsuit challenging FHFA’s policy concerningPACE programs has not been dismissed at the outset.Although defendants have appealed the decision to theNinth Circuit, it has lead to an outpouring of commentson the value of PACE programs. On June 15, 2012,FHFA released a proposed rule that largely tracks theirprevious position that Fannie Mae and Freddie Macare prevented from purchasing mortgages containingPACE liens. The Ninth Circuit has held that the agencyis not required to publish a final rule until the appeal isheard. Even if FHFA reaches the same conclusion in itsfinal rule, this conclusion is subject to judicial reviewand must satisfy an arbitrary and capricious standard.

Cullen Howe is an environmental law specialist inArnold & Porter’s environmental practice group,where he focuses on climate change, greenbuildings, and other environmental issues.

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INDUSTRIES ALIGN TO CHALLENGEEPA E15 WAIVERS

Sarah E. Melchior

A recent controversy under the Clean Air Act (CAA)deals with EPA’s regulation of fuel additives to protectemission-control devices. The Act prohibits fuelmanufacturers from introducing new fuels and fueladditives into commerce for general use. Additionally,Section 211(f)(3) of the CAA requires theEnvironmental Protection Agency (EPA) to prohibit orrestrict “the concentration of any fuel additive which[the Administrator] determines will cause or contributeto the failure of an emission control device or system.”Section 211 (f)(4) further provides that EPA may grantwaivers to the above prohibitions to applicants whoestablish that

the fuel or fuel additive or specified concentrationthereof, will not cause or contribute to a failure ofany emission control system (over the useful life ofthe motor vehicle, motor vehicle engine, nonroadengine or nonroad vehicle in which such device orsystem is used) to achieve compliance by thevehicle or engine with the emission standards withrespect to which it has been certified.

EPA granted two such waivers in October 2010 andJanuary 2011 for gasoline containing up to 15 percentethanol (E15). The combined effect of the two waiversis to permit the commercial introduction of E15 for usein motor vehicles with model year 2001 or later. Thewaivers carry with them additional labeling andregistration requirements. In April 2012, EPAannounced its approval of the first applications forregistration of ethanol for use in the production of E15,announcing that “[r]egistration of ethanol to make E15is a significant step toward its production, sale, anduse.” Opposition to the introduction of E15 into themarket has come from various industries, includingagriculture, marine and automobile manufacturers, andoil companies. These industries’ legal challenges toEPA’s partial E15 waivers have been consolidated, andthe case is now at the United States Court of Appealsin the D.C. Circuit.

Oral arguments for National Grocery ManufacturersAssociation v. EPA were heard on April 17, 2012.

Challenge to the EPA’s Authority to GrantPartial Waivers

The petitioners, representing three primary industrygroups (Food Producers, Petroleum Companies, andSmall/Marine Engine Products), argued that EPA’sgrant of partial waivers is a violation of the CAA.During oral arguments, Judge Brett Kavanaugh said, “itall comes down to one word—any.” Focus on theword “any” is a reference to the provision of the CAA,cited above, that vests in EPA the power to grantwaivers for specific concentrations of fuel additives, inthis case ethanol, as they affect “any” emission-controlsystem. Because the effect of the waivers, takentogether, is to allow the introduction of E15 only formodel 2001 and later passenger automobiles, thepetitioners argue that the waivers exceed EPA’sauthority under the CAA and are unsupported by theadministrative record. The petitioners argued that EPAdoes not have the authority to approve the use of E15for some vehicles but exclude others. EPA argued thatthe “any” in question refers only to the emissions-control device in the vehicle, an interpretation of thestatute that enables the EPA to evaluate the impact ofE15 on subsets of the vehicle market, thereforejustifying the grant of partial waivers.

EPA’s justification for the partial waivers rests ontesting done by the U.S. Department of Energy(DOE). Legislators who agree that EPA’s grant of thepartial waivers for E15 was premature have beenadvocating for more testing and research concerningthe introduction of E15 into the market. E15, theyargue, has been linked to premature engine failure andlower fuel efficiency. The petitioners in GroceryManufacturers Association v. EPA also contend thatEPA failed to provide a meaningful opportunity forcomment on the DOE Catalyst Study, which wasinstrumental in its decisions to grant the partial waivers.According to their final brief, the petitioners asserted,“[t]he DOE Catalyst Study plainly revealed that E15would cause emissions failures in certain vehicles. ButEPA manipulated that data by ‘averag[ing]’ the testresults as to models as a group so that these failuresdisappeared.” Chief Judge Sentelle appears to haveresponded favorably to the petitioner’s arguments thatEPA acted outside of its statutory authority, stating

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“[y]ou’ve got an excellent argument on the merits. Myproblem is getting there.”

Industry Groups’ Standing to ChallengeEPA Waivers

Based on Chief Judge Sentelle’s comments, theultimate hurdle for the petitioners appears to bedemonstrating their standing to challenge EPA’s action.The petitioners put forth an argument for both ArticleIII standing and prudential standing. A showing ofArticle III standing requires the petitioners to convincethe appellate judges that they have been adverselyimpacted by the E15 waivers. Arguments fromlivestock, poultry, and dairy producers expressconcern that the E15 waivers will have harmful effectson their industries by raising the price of corn-basedanimal feed. They argue that the increased demand forcorn to be used in ethanol production, referred to asdiversion, will increase corn prices. The petroleumindustry petitioners object to the E15 waivers becauseof the economic burden created by labelingrequirements and the special production,transportation, segregation effort necessary for the useof E15. Additionally, they contend the misuse of E15 inmarine engines, outdoor power equipment, andnonroad vehicles such as ATV’s and snowmobiles cancause substantial damage and lead to engine failure.These arguments remain somewhat speculative as tofuture—as opposed to present—injury, however theEPA did not raise the standing issues in its briefs.

The question of prudential standing relies on the zoneof interests test, which asks whether the challengingentity’s interests are regulated by the statute inquestion. Each petitioner group has a strong argumenton this point. The engine products group must complywith CAA emissions standards, and they argue E15 islikely to cause products to fail to meet those standards,which will expose them to the costs of noncompliance.The members of the petroleum group, which consistsof manufacturers and sellers of gasoline, assert theysatisfy the prudential standing requirements becausethey will have to sell E15 once introduced into themarket and thus bear the cost of doing so safely and incompliance with CAA requirements by installing newequipment and storage systems. Finally, “[g]iven the

connection between feedstock prices and biofuel,Petitioners have a direct economic stake in ensuringthat the balance between the two. . . is implementedand preserved.” The result in Grocery ManufacturersAssociation v. EPA will likely hinge on the success ofpetitioners’ standing arguments.

Conclusion

From a public policy standpoint, the industry groupsought to prevail on the merits of this case. EPA is onshaky legal ground granting partial waivers for E15 usein a limited class of vehicles, a ground that is difficult tojustify given the criticisms of the Agency’s plans fordealing with both intentional and unintentionalmisfueling by consumers. Even with the orange andblack labels on E15 pumps, uninformed consumers arelikely to put the fuel in a vehicle for which it is notintended, resulting in potentially dangerous or costlyconsequences. In fact, automobile manufacturers suchas Toyota and Lexus are labeling the gas caps onmodel year 2012 cars (which are compatible with E15according to the EPA) with a warning to customersagainst filling their tanks with E15. Misfueling couldeven lead some automobile owners to void theirmanufacturer’s warranties because the vehicles madeprior to the waivers by manufacturers who did notanticipate its entry into the market are not compatiblewith E15.

The outcome of litigation in response to EPA’sproposed waivers allowing use of E15 will haveimportant implications for the scope of EPA’s authorityto allow entry of fuel additives into the market and fora range of other potentially affected interests includingagricultural interests, gasoline distributors, autocompanies, and ultimately the driving public. A decisionfrom the United States Court of Appeals for the D.C.Circuit will consequently be of great interest.

Sarah E. Melchior is a 2013 J.D. Candidate at theCollege of William & Mary, Marshall-Wythe Schoolof Law, and she is a staff member on the William &Mary Bill of Rights Journal. Ms. Melchior earnedher B.A. magna cum laude from the University ofConnecticut, where she was inducted into Phi BetaKappa.