McCarter & English, LLP : Climate Change Blog

Tuesday, March 23, 2010

Mixed Signals Sent by Governors Raiding RGGI and Clean Energy Budgets

In the past, we've explored the importance of regulatory certainty and the challenges posed by regulatory uncertainty. Whether financing clean tech and renewable energy projects or deciding which states provide the best incentives for manufacturers and developers of such emerging technologies and renewable projects, a state's regulatory environment plays a critical role. This is why recent actions by some governors to move money out of the budgets designated for clean tech and renewable energy or energy efficiency projects for use in closing budget gaps raises a concern.

As known to readers of our climatelawyers blog, the Regional Greenhouse Gas Initiative (RGGI) was the first mandatory regional cooperative in North America through which ten signatory states in the northeast have committed to cap and then reduce carbon dioxide emissions by setting carbon emission limits on the power industry. The compliance period began in 2009. As discussed in a blog entry from September 2009 just after the results of the 5th auction were announced, we posited that the drop in auction prices from the 3rd Auction to the 5th auction may be attributable to the regulatory uncertainty then-apparent as to the future of RGGI in light of the draft climate and energy legislation that was working its way through Congress at the time. To the extent that the regulatory programs in place provide market signals and some certainty as to the commitment of the RGGI member states to promoting clean tech, renewable energy, and energy efficiency measures, the raiding of these funds creates the opposite effect: it dilutes the efficacy of the regional cap and trade program and sends mixed signals to the very industries that RGGI was intended to encourage.

Revenues from the RGGI auctions were specifically designed to help the member states further the goals of the regional cap and trade program and to encourage new clean tech industries to settle in these states, create more jobs in the green and clean tech space, implement greenhouse gas emission reduction and energy efficiency measures, and help customers struggling with energy bills. As indicated in a press release issued by Governor Paterson in December 2008 following New York's participation in the RGGI auction process, "[t]he RGGI regulations require that the New York State Energy Research and Development Authority (NYSERDA) use the proceeds for energy efficiency, renewable energy, programs to reduce greenhouse gas emissions in other sectors of the economy and other initiatives." In the spring of 2009, NYSERDA approved a plan to invest the RGGI funds. In December, the New York legislature approved New York's Governor Paterson's proposal to raid the RGGI auction fund, moving $90 million of New York's then-share of the RGGI money (which, at the time comprised half of the total $180 million allocated to New York from the auction proceeds) to the State's general fund to cover the State's budget shortfall. Following suit, just last week, New Jersey's Governor Christie decided to move $65 million raised through the RGGI auctions (the full amount allocated to New Jersey from the RGGI auctions to date) from the Global Warming Solutions Fund to the general fund to help address the State's deficit. Connecticut is now contemplating moving money from funds reserved for energy programs to help address its budget shortfall. In contrast, Rhode Island announced last week that it will not shift RGGI money to fill that state's budget shortfall, noting that state law prevents the governor from moving the nearly $9.3 million received by Rhode Island through the RGGI auctions away from the intended purpose of energy efficiency and renewable energy projects.

No one disputes the reality that the current economy forces states to make difficult decisions. However, raiding funds that were created through state and regional programs specifically to encourage energy efficiency, renewable energy, and clean tech initiatives creates further regulatory uncertainty when developers and entrepreneurs in these fields require reduction of regulatory risk in order to commit to enter a state and compete in this still-emerging market. It also sets a troubling precedent and casts a cloud over the potential efficacy of future cap and trade programs proposed on a federal level absent, of course, measures incorporated into such pending federal legislation that prohibits such behavior. So, while some may think that only environmentalists are opposed to the recent efforts by certain states to address their budget shortfalls by raiding energy efficiency, clean tech and renewable energy funds, there is another significant sector adversely impacted by this behavior: the very industries and entrepreneurs who are looking for regulatory signals that encourage such companies to enter the marketplace and compete globally in the renewable energy, efficiency, and clean tech sectors.

Posted By Grace Kurdian At 2:15 PM • Comments (0)

Sunday, March 07, 2010

Remember Hurricane Wilma? The Damage is Still Not Paid For

There was scary news out of Florida at the end of last month. Insurers were lobbying the cabinet for an increase in catastrophe fund insurance policyholder fees. This is the surcharge Florida regulators place on every automobile and property policy to pay for the Florida Catastrophe Fund, which needs up to $710 million to pay for 2005 (sic) claims that are still coming in. The Fund managers sought to increase the current surcharge from 1% to 1.3% of premiums.

The increase was rejected by the Florida cabinet, ostensibly because of concerns over fraud. Seems public adjusters in Florida are too effective and have precipitated an unbudgeted increase in payouts from the Fund. The explanation for the increase in claims and payouts is that fraud is being carried on. Cynical observers cite a different reason. Governor Crist is running for the Senate and is not going to be tagged with increasing the cost of insurance.

Whatever the reason, what should really be cause for concern is that the Fund may need an additional $710 million.

I have blogged repeatedly and skeptically on the beach pools and wind pools. Turns out I am not alone. Zurich Insurance Company published a White Paper last summer that makes the point far more eloquently than I did.

In The Climate Risk Challenge: the role of insurance in pricing climate-related risks, http://www.zurich.com/main/insight/introduction.htm, Zurich posits that in addressing climate change, there is a great need to engage the insurance industry's skill in managing risk. The trick is how to engage an industry whose business is protecting private assets, so that that protection furthers the public good.

Zurich points out that this has been done before. Fire protection codes and vehicle safety requirements are two areas of note. Following along in that vein, climate-friendly requirements that are built into zoning and building codes, such as hurricane-proofing structures, mandating energy efficiency, and restricting construction in flood -prone areas, can be supported by insurance products, which will bring market forces into play.

However, as Zurich notes, "The ability of the insurance industry to assist public policy-makers in the effective and efficient implementation of climate change policy is to a large extent dependent on [policymakers'] willingness to resist the temptation to distort markets in a manner that interferes with the role of and ability of insurers to send price signals about risk." Distortion seems rampant in Florida. In the fifth year after Hurricane Wilma, the Florida Catastrophe Fund still lacks sufficient funds to pay for those claims. Perhaps more significantly, the procedure in place to pay for those losses cannot do so.

Zurich's tag-line is "Because change happenZ." I would amend that. "Because climate change is happening." Policymakers need to tap into the experts who manage the balance between risk exposure and financial sustainability. Until the Florida insurance market reflects true price signals for risk, those experts are very likely to remain sitting on the sidelines and Florida's hurricane risk effectively uninsured.

Posted By J. Wylie Donald At 9:15 PM • Comments (0)

Friday, March 05, 2010

CDP 2010 Is Upon Us

We talked in January about the SEC's disclosure guidance and noted the relevance of the Carbon Disclosure Project. It's almost as if I have a hotline to 40 Bowling Green Lane in London, where the CDP offices are. I receved earlier this week their announcement of the 2010 questionnaire. It has been sent to 4,500 companies globally. The number of institutional investors behind the mailing is over 500 "with a combined US$64 trillion of assets under management."

The email has this to say about the SEC guidance: "CDP welcomes the recent climate change risk disclosure guidance by the Securities and Exchange Commission (SEC); an important step in helping US companies better report material climate change impacts to their investors."

Following one of the links in the email, I proceeded to the CDP webpage, where I learned more. The CDP recognizes one of the critical weaknesses of climate change data in a global marketplace: "There is currently no global carbon disclosure framework and ... to minimize the financial and reporting burden for companies, guidance on disclosure of climate change information must be as harmonized as possible."

To achieve that end, CDP manages the activities of the Climate Disclosure Standards Board (CDSB). The CDSB has prepared a draft Reporting Framework www.cdsb-global.org/uploads/pdf/CDSB_Reporting_Framework.pdf to further the dialogue of disclosure. In the CDSB's words: "the Reporting Framework provides a workable filter for companies to identify, and for investors to see, the major trends and significant events related to climate change that affect a company’s current or future financial condition."

The interesting question in all this is whether at the beginning of the period of climate change, "a workable filter" can be established. To be honest, we do not know all the effects climate change will visit upon us. Yet any measurement system is required to make assumptions about what is and what is not important. What is important is disclosed, what is not important is ignored, even suppressed.

By way of example, the information from which one could have concluded that sub-prime mortgages and collateralized debt obligations were problematic was available throughout the period leading up to the financial meltdown of 2008. The financial markets, investors, corporations and governments had well-developed systems to identify, process and deliver information concerning the risks and opportunities of certain investments. Somehow, however, all the appropriate signals were missed and billions of dollars disappeared overnight.

We need to be aware of this possibility as we move forward with reporting climate change risks and opportunities. Development of a uniform system is no doubt valuable. But if it leads to a failure to identify certain risks because those risks are invisible because of how the framework is drawn, then it does not help, it hurts.

Posted By J. Wylie Donald At 8:02 PM • Comments (0)