The regulation aims to reduce overall greenhouse emissions in California to the 1990-level by 2020.  The 2020 goal represents a 15% reduction in emissions compared to expected emissions in 2020 if no plan had been enacted.  Reduction measures will be introduced in two phases; beginning in 2013, major industrial sources will be targeted and, beginning in 2015, distributors of transportation fuels, natural gas and other fuels will also be regulated.  In total, according to CARB, the regulation impacts 360 businesses and 600 facilities.

Companies regulated under the program will not be given a specific limit on the greenhouse gases they can emit but, rather, must provide sufficient allowances to cover their emissions.  One allowance is equal to one ton of carbon dioxide.  Each year, as the cap declines, the number of allowances will decrease as well.  Allowances will be awarded by CARB during the initial period of the program (2013-2014) to the most efficient companies.  Additional allowances may be purchased during CARB quarterly sales and on the market. Electric utilities will be given allowances to sell at auction to help achieve AB32 goals.  The first auctions are expected to take place in August and November 2012 (for 2013 allowances).

The regulations also provide for the use of offsets to meet emissions requirements.  Up to eight percent (8%) of a company’s emissions may be covered using credits from CARB-certified offset projects.  Offsets are reductions in greenhouse gas emissions from sources outside of the cap-and-trade program.  

CARB has indicated that the regulations are designed such that California may link with other programs in the Western Climate Initiative.  CARB has also approved an adaptive management plan to monitor the impact of the program on localized air quality and forests.

The final regulations must be filed with the California Office of Administrative Law by October 28, 2011.

Please contact John Leonti at (949) 622-2769 or john.leonti@troutmansanders.com with any questions.

The consent decrees require the plants, Ampersand Chowchilla Biomass, LLC (ACB) and Merced Power (MP), to pay $328,000 and $492,000 respectively. As part of the settlement, the plants must install continuous monitors to improve tracking and reporting of emissions, enhance automation of the control systems for nitrogen oxide emissions, and prepare more stringent emission control plans.

According to press releases regarding the settlement, Global Ampersand purchased and refurbished the two plants in 2007 and 2008. Shortly afterwards, the District initiated inspections to determine compliance with “authority to construct” permits (“ATC permits”) issued to MP and ACB in 2005 and 2007. As part of the inspections, the District measured stack emissions, evaluated visible emissions (opacity) from the plants fuel-handling systems, and assessed compliance with ATC permits for boilers, biomass handling, and fly ash handling.

The inspections prompted the District and EPA to issue several notices of violations (“NOVs”), and triggered a more extensive joint investigation of the plants. EPA and the District concluded that the plants violated ATC permits by: 

• Emitting nitrogen oxide, sulfur dioxide, ammonia, and carbon monoxide in excess of permit limits;
• Exceeding applicable opacity standards;
• Failing to perform timely source testing to measure emissions of various air pollutants;
• Failing to properly install and operate emissions control systems for nitrogen oxides;
• Failing to certify the continuous emissions monitoring systems; and
• Failing to comply with various District rules including requirements for emissions control plans.

As part of the press release regarding the settlement, EPA noted that it “could not presume” whether the alleged violations were indicative of “the biomass power industry in general,” but we would recommend that biomass plant operators prepare for similar air quality inspections at their facilities in the near future – EPA tends to expand enforcement investigation efforts into industries where recent inspections have yielded significant penalties.
 
These alleged violations also highlight the importance of post-construction air permit compliance for biomass plants. Often, biomass developers do not have a strong background in environmental compliance and the potential liabilities associated with post-construction operating permit requirements. Without such experience, development companies may agree to permit terms during the pre-project phase that are difficult to comply with after the project is complete. As such, companies who are acquiring recently-permitted, but not yet constructed, biomass facilities should carefully consider and plan for post-construction compliance obligations as part of due diligence.

The lawsuit was originally brought in the United States District Court for the Southern District of New York by eight states, the City of New York and several environmental parties against five electric utilities.  The suit alleged that the companies’ coal-fired plant emissions were a significant cause of global warming and constituted a public nuisance actionable in tort.  The District Court dismissed the case in 2005, holding that the lawsuit presented a “political question” that was not appropriate for judicial resolution.  However, in September 2009, the Second Circuit overturned the District Court, found that the plaintiffs properly stated a cause of action for “public nuisance,” and rejected Defendants’ argument that Clean Air Act regulation of greenhouse gases displaced Plaintiffs’ federal common law nuisance claims.

Granting the petition for certiorari does not mean that the Court will overturn the Second Circuit decision, only that the Court will now consider the issues on the merits.  One development of note is that Justice Sonia Sotomayor recused herself from considering the petition and will undoubtedly also recuse herself from the merits decision.  Justice Sotomayor was on the Second Circuit panel that heard oral argument on Connecticut v. AEP, but recused herself from taking part in the Second Circuit’s decision after learning of her nomination to the Supreme Court. 

For more information, please visit our previous discussion of the Connecticut v. AEP case.

The Security and Exchange Act of 1934 criminalizes “willful” violations of its provisions and certain SEC rules or regulations.  While in some other contexts the term “willful” signals a requirement that the defendant “knowingly” violated federal law, several U.S. Courts of Appeal, including the Second and Ninth Circuits, have held that the government need only show that the defendant “intended to commit an act prohibited under the statute.”  The Second Circuit reiterated this position as recently as July 1, 2010, when it upheld the trial court’s jury instruction defining the term “willful” under the Act with reference only to the defendant’s “intent to cause a deception, a falsification,” rather than requiring any knowledge of illegality.  United States v. Kaiser, 609 F.3d 556, 567-68 (2nd Cir. 2010) (reversing conviction on other grounds).  The Court reached this interpretation due in large part to the Act’s “unique statutory language,” which criminalizes willful violations, but shields defendants who violate a rule or regulation without knowledge of its existence from imprisonment.  The Second Circuit had previously suggested that this safe harbor provision would be meaningless if the threshold for criminal liability in the first place was knowledge of illegality.  United States v. Dixon, 536 F.2d 1388, 1396 (2nd. Cir. 1976).  In other words, a person can “willfully” violate an SEC rule even if he does not know of the existence of the rule. 

While Courts in other jurisdictions have yet to definitively interpret the “willful” requirement of the Act’s penalty provision, a number of decisions indicate that judges within those circuits may likely lean in the Second Circuit’s direction.  The Fourth Circuit, for example, upheld a securities fraud conviction focused on the defendant’s intent to manipulate and deceive, making no indication that it required a knowing violation of the Act.  See Bryan v. United States, 58 F.3d 933 (4th Cir. 1995).  In United States. v. Johnson, 553 F. Supp. 2d 582 (E.D. Va. 2008), the District Court likewise focused on the defendant’s act of designing a scheme to defraud investors with no reference to his knowledge of securities laws.

With prior cases from Courts like the Fourth Circuit focusing on the defendant’s intent to commit wrongful acts, and the Second Circuit’s interpretation of the Securities and Exchange Act’s penalty provision, companies and individuals would do well to err on the side of caution and treat the Second Circuit’s view of the Act as prevailing law in any circuit that has not explicitly held otherwise.  Despite the “willful” requirement under the Act, if an incident occurs that could give rise to an enforcement action, asserting lack of knowledge of securities laws and regulations is unlikely to make the government go away.  Given the recent tenacity with which the Commission has pursued such actions, and its new ability to effectively provide bounties for a whistleblower’s information on criminal violations, companies’ and individuals’ potential exposure in this context will likely only increase in the future.