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Shortly after President Obama’s election, conventional wisdom generally held that comprehensive federal energy and climate legislation, including a cap-and-trade system to reduce greenhouse gas emissions, would be passed by 2010 and take effect in 2012 in coordination with a successor treaty to the Kyoto Protocol.

Although passage of a comprehensive bill is still possible this year, the path ahead for GHG regulation is littered with obstacles. Nevertheless, the real estate and development community should be prepared for potential impacts.

The House of Representatives passed the American Clean Energy and Security Act on June 9, 2009. ACES is a comprehensive energy and climate change bill that includes a cap-and-trade system under which the total amount of GHGs that can be emitted nationally is legally capped. Companies either are issued permits to emit these gases, or purchase and sell the permits.

Because ACES cannot pass the Senate, Sens. John Kerry, Lindsey Graham, and Joe Lieberman are attempting to create support for a bipartisan bill that can. The Senate bill is believed to combine aspects of ACES with provisions that are generally considered more favorable to industry.

These provisions likely include a hard price collar on emissions permits to better control costs, preemption of Environmental Protection Agency climate regulations under the Clean Air Act and preemption of state climate initiatives that have already become law to ensure uniformity of regulation, and slower phase-in times and perhaps alternative regulatory approaches for certain industry sectors that may have more difficultly adapting to GHG regulation.

The Obama administration is pressing for passage of a comprehensive climate and energy bill this year. Earlier this month, Larry Summers, director of the National Economic Council, and Carol Browner, director of the White House Office of Energy and Climate Change Policy, affirmed the Obama administration’s commitment to placing a first-ever price on domestic GHG emissions. Summers’ remarks were included in an important speech making the economic case for comprehensive energy reform.

Despite the efforts of Congress and the Obama administration, the prospects for passing a comprehensive climate and energy bill remain uncertain because of the threat of a Senate filibuster. In the absence of comprehensive federal legislation, however, GHG regulations are being decided by administrative agencies and the courts.

In 2007, the U.S. Supreme Court ruled that the EPA had the authority to regulate GHG emissions from motor vehicles and is required to regulate them if the emissions endanger the public health or welfare.

The EPA has since found that carbon dioxide and other greenhouse gases do endanger public health and welfare. In response, and slightly ahead of a Feb. 16, 2010, deadline, several lawsuits were filed that challenge the EPA’s finding.

These lawsuits notwithstanding, the EPA’s new GHG reporting rule, which requires many large sources to report their emissions, took effect on Jan. 1, 2010. The EPA is also preparing to finalize new GHG emissions regulations for stationary sources and motor vehicles. Because the endangerment finding is a necessary precursor to these regulations, this lawsuit indirectly challenges those pending regulations as well.

The EPA is not the only administrative agency actively seeking to regulate GHG emissions. On Feb. 18, 2010, the Council on Environmental Quality issued a draft guidance document regarding the review of climate change impacts under the National Environmental Policy Act. Although some courts have concluded that NEPA requires consideration of a project’s GHG emissions on climate change, this is the first time that the council has addressed the issue.

Additionally, the Securities and Exchange Commission recently released guidance documents indicating that material, physical, financial or regulatory risks due to climate change must be included in public companies’ SEC filings.

Finally, apart from the administrative regulations and associated lawsuits, in late 2009 the federal 2nd and 5th circuit courts of appeals allowed common-law nuisance lawsuits, brought by private parties against energy companies, to proceed past the pleading stage.

A similar suit is currently before the U.S. Court of Appeals for the Ninth Circuit. Thus, major emitters of GHGs may face tort liability in the courts, and judges could fashion remedies that are similar to a cap-and-trade system for emitters within their jurisdiction.

Passage of a comprehensive energy and climate bill would provide regulatory certainty and, depending on its final form, stimulate various sectors of the economy – likely including traditional energy exploration, nuclear power, energy efficiency, renewable energy, and research and development funding for carbon capture and storage. In the absence of a comprehensive bill, there will be a maze of regulations through a combination of federal agency, federal court, regional and state actions.

For the real estate and development community, an immediate impact of GHG regulation is the extension of NEPA to include GHG emissions analysis for major projects requiring a federal permit. If a comprehensive bill is passed, there should be further federal financial support for weatherization and efficiency projects.

Although early regulation of GHG emissions focuses on major emitters such as power plants and refineries, a recent survey found that 27 percent of emissions in the Portland-metro area come from energy consumed in the built environment. Thus, as GHG emissions limits, however imposed, eventually tighten, stringent energy efficiency and building environmental performance standards are all but inevitable in the long term.

Peter Sergienko is a partner in the Portland office of Davis Wright Tremaine. He specializes in environmental compliance issues. Contact him at 503-241-2300 or [email protected].