On June 26, 2009, the United States House of Representatives passed

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1 Skadd en, Arps, S l at e, Me a gh e r & Fl om L LP & Affil i a te s If you have any questions regarding the matters discussed in this memorandum, please contact the following attorneys or call your regular contact. Kenneth Berlin Washington, D.C kenneth.berlin@skadden.com William L. Thomas Washington, D.C william.thomas@skadden.com Clifford (Mike) M. Naeve Washington, D.C mike.naeve@skadden.com * * * This memorandum is provided by, Arps, Slate, Meagher & Flom LLP and its affiliates for educational and informational purposes only and is not intended and should not be construed as legal advice. This memorandum is considered advertising under applicable state laws. The American Clean Energy and Security Act Clears the House: July 17, 2009 An Overview of the Global Warming Reduction Program On June 26, 2009, the United States House of Representatives passed H.R. 2454, entitled the American Clean Energy and Security Act of 2009 (the Act), as amended. Introduced by Committee Chairman Henry Waxman (D-CA) and House Energy and Environment Subcommittee Chairman Edward Markey (D-MA), the Act is intended, in the words of Chairman Waxman, to create millions of new clean energy jobs, save hundreds of billions of dollars in energy costs, enhance America s energy independence and cut global warming pollution. The Act contains four titles, each of which is dedicated to one of four interconnected objectives: promoting clean energy, increasing energy efficiency, combating climate change and assisting the transition to a clean energy economy. Title III of the Act, summarized generally in this briefing, represents the most significant progress to date toward regulating emissions of carbon dioxide in the United States through a cap and trade program. Establishment of the Cap The Act would regulate GHG primarily by amending the Clean Air Act (CAA) to add a Title VII, establishing the Global Warming Reduction Program. This program would install a cap and trade program on emissions of GHGs covering approximately 85 percent of the United States economy. The Act would establish a total number of emission allowances to be made available each calendar year to entities that are covered under the cap. The Act covers downstream sources such as electricity generators and industrial stationary sources emitting more than 25,000 tons of carbon dioxide or the equivalent amount of other GHG (CO2e) per year. In some instances, when it is impractical to regulate the actual emitter, the Act moves upstream to cover such entities as fuel producers and importers, producers and importers of GHGs, and natural gas local distribution companies. Compliance obligations for covered entities are to be phased in over the years 2013 through 2016, depending on the industry in which the entity operates. Once covered under the cap, entities would be required to submit one allowance to the EPA for each ton of CO2e emitted in the previous calendar year. Once the cap is fully implemented in 2016, the number of emission allowances ratchets down each year, thereby reducing GHG emissions over time. By establishing such a cap, the Act aims to reduce the GHG emissions of covered entities to 3 percent below 2005 levels by 2012; 17 percent below 2005 levels by 2020; 42 percent below 2005 levels by 2030; and 83 percent below 2005 levels by Distribution of Emission Allowances According to Waxman and Markey, the Act allocates emission allowances to accomplish three primary goals: (1) protect consumers from energy price increases; (2) assist industry in the transition to a clean energy economy; and (3) spur energy efficiency and the development and deployment of clean energy technology. In addition, the Act allocates a portion of allowances for programs

2 2 established for purposes of preventing deforestation, promoting adaptation and providing green jobs training. Electric Utilities The Act distributes freely to the electricity sector percent of the allowances created for the years 2012 through 2013, percent of the allowances for years 2014 through 2015, and 35 percent of the allowances for the years 2016 through 2025, with the free distribution of allowances phasing out over a five year period from 2026 through While the percentage of allowances allocated to the electricity sector is higher in the initial years, this will not result in a significantly higher actual distribution of allowances to utilities during that period. This is because the amounts of allowances created for the years 2012 through 2015 are smaller than the amount created for the year 2016, when the cap is fully implemented and all covered entities have compliance obligations. Local electric distribution companies would receive no less than 85.7 percent of the emission allowances allocated to the electricity sector for a given year, while merchant coal generators would receive no more than 10 percent of the emission allowances allocated to the electricity sector for a given year. Long-term contract generators (small power production facilities or cogeneration facilities subject to sales agreements that do not allow them to recover the cost of compliance with the cap) would receive no more than 4.3 percent of the emission allowances allocated to the electricity sector for a given year. Individual local electric distribution companies would receive their allotment of allowances ratably pursuant to a formula based on electricity delivery and baseline period emissions. Individual merchant coal generators would receive their allotment of allowances ratably pursuant to a formula based on merchant coal unit sales and baseline period emissions, while individual long-term contract generators would receive their allotment ratably based on the amount of CO2e emitted as a result of qualifying electricity and thermal sales agreements. Additionally, the Act allocates to small electricity local distribution companies 0.5 percent of the allowances created for the years 2012 through 2025 with the distribution phasing out over the years 2026 through The allowances are to be used for energy efficiency, renewable electricity and lowincome ratepayer assistance programs. Natural Gas and Home Heating Oil Providers The Act allocates 9 percent of the allowances created for the years 2016 through 2025 to regulated natural gas local distribution companies, which are also mandated by the Act to use the allowances to protect consumers from natural gas price increases. These allowances phase out over a five-year period from 2026 through Allowances are to be distributed to individual entities ratably pursuant to a formula based on average retail natural gas deliveries over a baseline period. Home heating oil and propane customers are protected from price increases through an allocation of percent of allowances for the years 2012 through 2013, 1.67 percent for the years 2014 through 2015 and 1.5 percent for the years 2016 through This program also phases out by The allowances are allocated to state programs established to provide rebates or other financial assistance to customers. Allowances would be distributed to the states ratably based on the ratio of the carbon content of home heating oil and propane sold to customers within each state to the total carbon content of such fuels sold to customers in the United States.

3 3 Transition Assistance for Industry Energy-intensive, trade-exposed industries (eligible industrial sectors are to be determined by the EPA by June 2011) would receive a free distribution of up to 2 percent for the years 2012 and 2013 and 15 percent of allowances beginning in 2014 when more industries become subject to regulation. The distribution would then decrease each year at a percentage based on the decrease in the size of the cap until completely phased out. The Act provides the president with the authority to extend the program if necessary. Domestic oil refiners, including small business refiners, will receive a free distribution of 2 percent of allowances beginning in 2014 and ending in An additional 0.25 percent of allowances are earmarked solely for small business refiners. Carbon Capture and Sequestration Electric utilities and industrial operations undertaking carbon capture and sequestration (CCS) projects will receive a free distribution of 1.75 percent of available allowances from 2014 through 2017, with that number increasing to 4.75 percent of allowances for the years 2018 and 2019, and further increasing to 5 percent for the years 2020 through The Act stipulates that in order for a project to be eligible to receive emission allowances under this program, the owner or operator must be able to implement CCS technology capable of reducing CO2 emissions by 50 percent and sequestering it at sites that meet all applicable permitting and certification requirements. Only electricity generators with a nominal capacity of 200 megawatts or more and industrial sources emitting more than 50,000 tons of CO2 per year would qualify. Initially, allowances are to be distributed to electricity generating units pursuant to a formula based upon the amount of CO2 avoided by the project, with bonuses available for reductions of CO2 emissions beyond 50 percent and for early deployment. This method of distribution will only apply to CCS projects at the first 6 gigawatts of electricity generating units. After that, allowances are to be distributed via reverse auction, with project owners or operators participating in the auction by submitting bids to the EPA indicating the amount of allowances they wish to receive as incentive for a certain CCS project. The EPA would then choose the projects requesting the lowest amount of allowances. The Act stipulates that no CCS projects may receive allowances for more than 10 years of avoided CO2 emissions. The allocation of allowances for CCS to industrial sources is capped at 15 percent of the overall amount allotted to CCS. There are no provisions in the Act detailing how allowances are to be distributed to industrial sources. Rather, the EPA is charged with developing regulations regarding the distribution of allowances to industrial entities. The Act seeks to compel electricity generators to adopt CCS technologies by adding Title VIII of the Clean Air Act to impose performance standards with regard to CO2 emissions on new coal-fired power plants. The performance standards would apply to all units subject to the permitting requirements in Title V of the Clean Air Act that derive at least 30 percent of their heat input from coal or petroleum coke. Units commencing operation in the year 2020 or thereafter would become subject to performance standards allowing them to emit only 35 percent of the CO2 produced by the unit on an annual basis. Electricity generating units that commenced operation between 2009 and 2019 would be required to achieve an emission limit of 50 percent of the CO2 produced by the unit on an annual basis by the year The Act confronts the technology gap between the state of CCS technology today and the degree of implementation of CCS contemplated by the Act by providing for a CCS demonstration and early deployment program. Under this program, utility owners would be given the option, via referendum,

4 4 of forming the Carbon Storage Research Corporation, which would operate as a division of the Electric Power Research Institute. This corporation would be tasked with administering a program to accelerate the commercial availability of CCS technology by providing competitive grants, contracts and financial assistance to eligible entities. To fund this program, the corporation would collect an assessment on distribution utilities for all fossil-fuel-based electricity delivered to retail consumers. Distribution utilities would be entitled to recover the costs of this assessment from retail consumers. The assessment is designed to generate between $1 billion and $1.1 billion annually. Energy Efficiency and Clean Energy Technology The Act also allocates 9.5 percent of allowances to states for investments in renewable energy and energy efficiency from 2012 through This allotment declines to 6.5 percent of allowances in 2016 through 2017, 5.5 percent of allowances in 2018 through 2021, 4.55 percent of allowances in 2022 through 2025, and 4.5 percent of allowances for the years 2026 through Proceeds from the sale of these allowances are to be deposited in State Energy and Environment Development Accounts established by the Act. An additional 1 percent of allowances for the years 2012 through 2017 and 0.8 percent of the allowances for the years 2018 through 2050 are allocated to support state adoption of energy-efficient building codes and assist in energy-efficient retrofits of housing. Another 3 percent of allowances will be awarded over the years 2012 through 2017 to applicants to fund the development and manufacture of advanced technology vehicles and qualifying components. The percentage of allowance declines to 1 percent after 2017 before ending in The allowances would presumably be sold by the recipient to provide funding. Finally, 1.5 percent of allowances are allocated to support energy research and development. This allotment is available from 2012 through International Deforestation Reduction Program The Act allocates 5 percent of allowances over the years 2012 through 2025 to a program designed to achieve supplemental reductions in GHG emissions through the prevention of deforestation in developing countries. The percentage declines to 3 percent for the years 2026 through 2030, and to 1 percent for the year 2031 and thereafter. The goal of this program, which is to be to be administered by the EPA and USAID, is to achieve emission reductions, additional to those accomplished domestically, equivalent to 10 percent of 2005 U.S. emissions by the year The program aims to build capacity in developing countries to reduce emissions from deforestation and to protect intact forest from any shifts in land use as a result of reduced deforestation in other areas. Activities supported by this program would include national and subnational deforestation activities; activities to measure, monitor and verify deforestation, avoided deforestation and deforestation rates; leakage prevention activities; and development of governance structures to reduce deforestation and illegal logging. Activities supported through this program must be environmentally sound and should protect the rights of indigenous groups and local communities. Beyond a five-year period, the Act conditions continued support to countries participating in the program on making substantial progress toward adopting and implementing a program to achieve reductions in deforestation measured against a national baseline. Alternatively, forest projects, both domestic and international, can be designed to create offset credits. A more thorough discussion of offset projects can be found below. Additional Allowance Allocations The Act also provides for an allotment of 0.28 percent of emission allowances to support supplemental agriculture and renewable energy programs. These programs are described in more detail below. An additional 4 percent of allowances are dedicated to domestic and international adaptation programs

5 5 from 2012 through 2021, with that percentage increasing to 8 percent from 2022 through 2026, and 16 percent for 2027 and thereafter. Finally, 0.5 percent of allowances are earmarked for worker assistance programs from 2012 through and 2021 with that amount increasing to 1 percent for the years 2022 through Distribution of Allowances via Auction The Act allocates 15 percent of the allowances created for each calendar year to be distributed via auction, the proceeds from which will be used to provide financial assistance to low-income energy consumers in the form of energy tax credits or energy refunds, both of which are established by the Act. Unlike the other programs discussed above, this program does not phase out. In addition, all allowances not specifically allocated to other programs are to be auctioned off. Prior to 2026, proceeds from the auction of these unallocated allowances are to be deposited into the Treasury. After 2026, proceeds from the auction of unallocated allowances are to be placed in the Climate Change Consumer Refund Account and used to provide tax refunds on per capita basis to each household in the United States. Some commentators, referring only to the auction of allowances specifically designated for assisting low-income energy consumers, have assumed that the free distribution of the remaining 85 percent of allowances over the years 2016 through 2025 will result in a windfall to covered entities. This criticism appears to be somewhat misguided. States and other noncovered recipients of allowances can be expected to sell them in the open market; thus, covered entities will have to purchase those allowances before they can be used for compliance purposes. Table 1, below, compares the actual amount of allowances freely distributed to covered entities to the amount that will have to be purchased at auction or on the open market for compliance purposes across the time period contemplated by the Act. In actuality, the actual number of allowances freely distributed to covered entities hovers around 63 percent before beginning to phase out. By 2030, approximately 60 percent of all allowances will be distributed via auction, and less than 15 percent will be freely distributed to covered entities. Table 1. American Clean Energy and Security Act of 2009 Distribution of Allowances Percentage of Allowances Percentage of Allowances Freely Distributed to Covered Entities Auctioned Allowances (15% Dedicated to Low-Income Consumer Protection Across all Periods Percentage Allocated to Fund State, Federal and International Climate Change Programs

6 6 Alternative Compliance With the Cap International Emission Allowances Covered entities may hold an international emission allowance in lieu of a domestically issued emission allowance, subject to several conditions. The international program that issued the allowances must impose a tonnage cap on CO2e emissions, and the program must be at least as stringent as the program established by the Act. The holder of the international allowance must certify that the allowance has not been used for compliance purposes in any other GHG regulatory program. The EPA may modify the percentage, currently unlimited, of a covered entity s compliance obligations that may be satisfied by holding international emission allowances. Domestic Offset Credits The Act also provides for an alternative method of compliance by which covered entities may satisfy a percentage of their compliance obligations by holding offset credits in lieu of an emission allowance. Prior to the year 2018, both domestic and international offset credits retain the same value as an emission allowance for the purposes of complying with the cap; that is, covered entities may hold one qualifying offset credit per ton of CO2e emitted. After 2018, however, the value of an international offset credit is discounted relative to an emission allowance, such that 1.25 offset credits must be held in lieu of an emission allowance. The percentage of a covered entity s compliance obligation that may be satisfied by the use of offset credits is determined by formula. The percentage is reached by dividing 2 billion by the sum of 2 billion plus the total amount of emission allowances established for the previous calendar year. This formula acts to cap the total quantity of offset credits that may be used in a calendar year by all covered entities at 2 billion. Under the formula, covered entities would be able to satisfy 30 percent of their compliance obligation with offset credits in 2013, 29 percent in 2020, 35 percent in 2030, 45 percent in 2040, and 63 percent in The Act further stipulates that not more than half of the applicable percentage for a given year may be used by holding domestic offset credits, and not more than half may be used by holding international offset credits. See Table 2. Table 2. American Clean Energy and Security Act of 2009 Percentage of a Covered Entity s Compliance Obligation That May Be Satisfied with Offset Credits Percentage of Offsets International Domestic

7 7 However, the EPA may raise the amount of international offsets that may be employed if it finds that domestic offsets are unlikely to offset more than.9 billion tons of CO2e in any given calendar year. The Act establishes the framework of a federal program to control the creation and issuance of offset credits. The EPA is tasked with developing regulations for determining the eligibility of offset projects within two years of the Act s enactment, with the exception that all domestic agriculture and forestry related offsets will be governed by regulations promulgated by the Department of Agriculture within one year of the Act s enactment. The Act includes a list of domestic agriculture and forestry projects that must be included as eligible projects types in the Department of Agriculture s regulations. The EPA retains the authority under the Act to develop an international agriculture offset program. All offset projects must be additional, verifiable and permanent. Offset projects would be assigned a crediting period, during which a project will be eligible to generate offset credits. Except for sequestration projects and certain agriculture- and forestry-related projects, crediting periods range between five and 10 years. Once issued, offset credits may be freely sold, traded or transferred unless the credit has expired or has been used for compliance. To compensate for any initial shortage of offset credits, the Act provides for an early offset supply program. Under this program, the EPA would issue one early offset credit in exchange for an offset credit issued under a qualifying regulatory or voluntary GHG emission offset program. Qualifying GHG offset programs are those that were established under state or tribal law prior to January 1, 2009, and that issued offset credits pursuant to standards relating to project type, public disclosure, verification and accounting that are as stringent to those standards established by the Act. Offset programs not fitting the above criteria solely because they were not undertaken pursuant to state or tribal law, or because they were not established before January 1, 2009, may also apply to the EPA to be approved as a program eligible to receive offset credits. If the EPA determines that the criteria and methodologies employed by these programs are as stringent as those established by the Act, they must be approved with 180 days of application. Early offset credits issued under this program would only be available for offset projects started after January 1, 2001, and for GHG reductions, avoidance or sequestration occurring after January 1, The program is slated to end three years after the Act s enactment or by the date the EPA promulgates its offset program regulations, whichever occurs sooner. Domestic Term Offset Credits (For Agriculture and Forestry Projects) In addition to including agriculture and forestry projects in the standard domestic offset credit program, the Act also establishes a special program, called the domestic term offset credit program, for some agriculture and forestry projects. The necessity for such a program stems from the fact that some agriculture- and forestry-related offset projects can be prone to reversals or lack of permanence. The Act accommodates this fact by allowing the Department of Agriculture to issue term offset credits for agriculture- and forestry-related offset projects with crediting periods of less than five years. Term offset credits allow the holder of the credit to temporarily satisfy compliance obligations for a period of time equal to the length of the offset project s crediting period. Upon expiration of the term offset project s crediting period, the covered entity using the term offset credit for compliance purposes must hold an emission allowance or domestic offset credit for the purposes of finally demonstrating compliance. In the alternative, the covered entity may hold a new, nonexpired term offset credit for the purposes of continuing to temporarily demonstrate compliance. The combined quantity of term offset credits and domestic offset credits used by a covered entity to demonstrate compliance may not exceed one half of the total percentage of compliance obligations that may be satisfied by holding offsets, with the exception that offset credits used to finally demonstrate compliance will not be subject to the percentage limitation.

8 8 International Offset Credits The Act contemplates three primary types of international offset projects. First, the Act states that in host countries that have comparatively high GHG emissions, or comparatively greater levels of economic development, offset credits will only be issued for projects that result in GHG reductions measured by a reduction in emissions for that project s economic sector. The Act also authorizes the EPA to issue international offset credits in exchange for comparable instruments issued by an international body established under the United Nations Framework Convention on Climate Change. Finally, the Act provides for the issuance of offset credits for GHG reductions accomplished through deforestation reduction programs. Offsets will only be issued for projects taking place in qualifying countries, with the quantity of the offsets being determined by comparing national emissions from deforestation to a national deforestation baseline. The EPA may promulgate regulations establishing other qualifying international offset projects in addition to those described above. Additional Cost-Containment Mechanisms Banking and Borrowing Covered entities may bank an unlimited amount of unused emission allowances for use in future years. The Act also provides for the borrowing of allowances issued for a future year to satisfy compliance obligations in the current calendar year. Covered entities may borrow, without interest, an unlimited amount of allowances from the year immediately following the current year. Covered entities may also satisfy up to 15 percent of their compliance obligation by borrowing, with interest, emission allowances with vintage years of up to five years from the current calendar year. As interest, the borrower must hold for retirement at the time it borrows the allowance a quantity of emission allowances equal to 8 percent of the number of years between the calendar year in which the allowance is being used and the vintage year of the allowances that is being borrowed. Thus, a covered entity that borrows one allowance with a vintage year five years from the compliance year must actually submit 1.4 allowances to satisfy the compliance obligation for which the allowance was borrowed. Cost-Containment Through Strategic Reserve Auctions As an additional cost containment measure, the Act provides for quarterly Strategic Reserve Auctions. The reserve would be filled with 1 percent of the allowances established for the years 2012 through 2019, 2 percent of the allowances established for the years 2020 through 2029 and 3 percent of the allowances established for the years 2030 through 2050 for a total of 2.5 billion tons of emission allowances. The auctions are designed to prevent carbon prices from rising to economically harmful levels by offering for sale to covered entities only a set percentage of allowances at a minimum threshold price. For 2012, the minimum threshold price is set at $28. For the years 2013 and 2014, the price will increase by 5 percent plus inflation. Thereafter, the price would be 60 percent above the rolling 36-month average daily closing price for the given year s emission allowance vintage. If there is demand for allowances at these prices, release of allowances into the market at that price would relieve upward pressure on the price of carbon as long as demand for reserve allowances does not outstrip supply. For the years 2012 through 2016, allowances in amounts up to 5 percent of the cap for a given calendar year may be auctioned in strategic reserve auctions. For the year 2017 and thereafter, the percentage increases to 10 percent. If the price of carbon is below the minimum threshold price, there will be no demand and the allowances will be returned to the strategic reserve. Proceeds from the sale of strategic reserve allowances would be used to purchase and retire international deforestation offset credits. The EPA would then create emission allowances with which to replenish the strategic reserve in an amount equal to 80 percent of the retired international deforestation offsets.

9 9 Supplemental Pollution Reductions Regulation of Hydrofluorocarbons (HFCs) The regulation of emissions associated with the production and consumption of HFCs is undertaken separately from the cap and trade program established for other GHGs by amending Title VI of the CAA. The Act mandates that as of January 1, 2012, an entity must hold one consumption allowance or one destruction offset credit for every carbon dioxide equivalent ton of HFCs produced or imported. The amount of available consumption allowances declines over time, such that the amount of HFCs produced or imported will be reduced by 10 percent below the baseline amount by 2012, 33 percent below the baseline by 2020, 75 percent below the baseline by 2030 and 85 percent by The EPA is tasked with promulgating regulations establishing the baseline, but the Act stipulates that the baseline must lie somewhere between 280 and 370 million metric tons of CO2e. Consumption allowances will be distributed to importers and producers of HFCs through a combination of auctions and direct sales. The Act provides for the issuance of offset credits for the destruction of chlorofluorocarbons (CFCs) in the United States. Under these provisions, the destroying entity will receive destruction offset credits equal to 80 percent of the number of tons of CO2e reduction achieved through the destruction. The destroying entity would then be able to sell the destruction offset credit or use it for compliance purposes. The EPA is charged with the task of promulgating regulations that create standards and protocols for project eligibility, certification of CFC destroyers, destruction efficiency, and calculation of baseline emissions and global warming potential. The Act also provides the EPA with the option, subject to certain limitations, of issuing regulations that would expand the list of substances that can be destroyed for offset credits to include other substances designated as ozone depleting substances pursuant to Title VI of the CAA. Before the EPA can add a substance as eligible for offset credits, it must take into account that substance s CO2e value, ozone depletion potential, prevalence and emission rates. A substance may not be added to the eligible list if it has not been effectively phased-out pursuant to the Montreal Protocol. The Act also gives EPA the authority to issue a regulation to allow these destruction offset credits to be used as general offsets for the GHGs controlled under Title VII. Agriculture and Renewable Energy Incentives Programs The Act establishes a program under which the Department of Agriculture will provide incentives in the form of emission allowances for activities in the agriculture sector that reduce or avoid GHG emissions or sequester carbon but do not meet the criteria for offset credits established in the Act. Emission allowances may also be awarded under this program to support actions to adapt to climate change as well as to projects that prevent conversion of land that would increase GHG emissions. A second program, administered by the Department of Energy and the EPA, will provide emission allowances to state and local governments as incentives for the deployment of renewable energy infrastructure. Relationship to Preexisting Domestic GHG Regulatory Regimes The Act prohibits states or political subdivisions thereof from implementing or enforcing a carbon cap during the years 2012 through 2017, thus superseding existing and/or emerging GHG cap and trade programs such as the Regional Greenhouse Gas Initiative (RGGI) and the Western Climate Initiative (WCI). This provision would appear to allow individual states to impose more stringent controls on emitters than those imposed by the Act after To prevent unfair treatment of entities currently subject to state and regional GHG emission caps, the Act directs the EPA to issue regulations providing that an entity that holds emission allowances issued by California, the WCI or RGGI before December

10 10 31, 2011, for use in subsequent years may exchange those allowances for allowances established under the Act. Furthermore, as discussed above with regard to the early offset program, the EPA is authorized to issue offset credits in exchange for credits meeting certain criteria that were issued under qualifying regulatory or voluntary GHG emission offset programs. Relationship of the Global Warming Pollution Reduction Program to the EPA s Existing Authority Under the Clean Air Act The Act would direct the EPA to regulate uncapped sources of GHG emissions under the existing framework of the CAA by adding a new Title VIII of the CAA entitled Additional Greenhouse Gas Standards. These provisions direct the EPA to establish performance standards under CAA section 111 for uncapped stationary sources with GHG emissions greater than 10,000 tons of CO2e. However, no standards of performance may be established for capped GHG emissions sources unless the EPA determines that performance standards are appropriate because of environmental impacts unrelated to climate change. The Act prohibits the EPA from listing any GHG as a criteria pollutant or hazardous air pollutant on the basis of the gas s effect on climate change. The Act also exempts GHG emissions from triggering the CAA s New Source Review program and provides that such gases shall not be considered when determining whether a stationary source is required to operate pursuant to a permit under Title V. Thus, the Act moves to prevent the EPA from regulating capped sources of GHGs by any means other than through the cap and trade program established by the new Title VII. Looking Ahead While it may be true that, in the words of Chairman Markey, the House has passed the most important energy and environment bill in our nation s history, the prospects for enactment of Title III or legislation closely resembling it remain uncertain. Senate Majority Leader Harry Reid has given six Senate committees until September to prepare their own versions of a comprehensive energy bill that may produce a consensus in the Senate. The measures contemplated in Title III will undoubtedly heavily influence the climate provisions contained in these competing bills. As the legislative process continues, potentially toward a conference negotiation between the Senate and the House, the debate will be further informed not only by aspirations associated with climate talks set for Copenhagen in December, but by the specter of EPA regulation of GHG emissions under the CAA a specter that looms larger under the Obama administration in the absence of dedicated climate change legislation. Four Times Square, New York, NY Telephone: