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<p align="left"><font face="Arial"><strong><small>About The Author:<br>
<br>
</small></strong><span lang="X-NONE" style="color: black"><font size="2">
ROGER FELDMAN, Co-Chair of Andrews Kurth LLP Climate Change and Carbon
Markets Group has practiced law related to the finance of environmental and
energy projects and companies for 40 years. In particular, he has analyzed
and executed a wide variety and substantial value of project financings. He
chairs the American Bar Association’s Committee on Carbon Trading and
Finance, serves on the Board of the American Council for Renewable Energy,
and has been a senior official in the Federal Energy Administration. He is
a graduate of Brown University, Yale Law School and Harvard Business School.</font></span></font></p>
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<img src="../images/feldman.gif" alt="Washington Viewpoint by Roger Feldman" border="0" width="375" height="75"><p align="left"><b><u><br>
</u></b><u><b>August 2009</b></u></p>
<p class="MsoTitle" style="margin-bottom:0in;margin-bottom:.0001pt" align="center">
<span lang="X-NONE" style="color:black"><font size="6">A Post Woodstock
Perspective on Cap and Trade</font></span></p>
<p><strong>By Roger Feldman --
</strong><b>Andrews Kurth, LLP</b><strong><br>
</strong><font face="Arial" size="2">(<em>originally published by PMA OnLine
Magazine: 2009/</em>09/24)</font></p>
<div>
<p class="style11" style="margin-bottom: 0pt">
</p>
<p class="BodyText05DS"><span lang="X-NONE" style="color:black">It is
the 40th anniversary of Woodstock, the Moon Mission, the Miracle Mets,
and the Joe Namath Jets. Everything was possible in 1969. It was the
year before the business cycle bubble burst for a decade, and energy
prices became a national rather than a consumer issue, as a result of
the first oil embargo. NEPA and the environmental movement were
emerging green glimmers. The “energy crisis” as well as the “global
warming crisis” were not on many radars. The impact on America of
sustaining the drain of war on an overheated economy was not fully
appreciated. Concern with “fuels mix” might have involved a new herb,
potion, or cocktail. It was a simpler time.</span></p>
<p class="BodyText05DS"><span lang="X-NONE" style="color:black">Since
then, the Federal government has striven at various times to solve
pending problems in energy areas (as well as elsewhere) through price
controls, deregulation, mandatory consumption pattern rules and target
quotas, high tech innovation sponsoring agencies, tax credits, loan
guarantees, grants, and/or environmental credits of different types.
</span></p>
<p class="BodyText05DS"><span lang="X-NONE" style="color:black">The
debates over these solutions--which implicitly tilt as well to various
fuel mix solutions and technological fixes--have been articulated (some
would say camouflaged) with several broad, legally related themes:</span></p>
<p class="BulletList">
<span lang="X-NONE" style="font-family: Symbol; color: black">�<span style="font:7.0pt "Times New Roman"">
</span></span><span lang="X-NONE" style="color:black">Federal Preemption
vs. State Rights<br>
</span><span lang="X-NONE" style="font-family: Symbol; color: black">�<span style="font:7.0pt "Times New Roman"">
</span></span><span lang="X-NONE" style="color:black">Public
Interest/Consumers vs. Private Interest/Producers<br>
</span><span lang="X-NONE" style="font-family: Symbol; color: black">�<span style="font:7.0pt "Times New Roman"">
</span></span><span lang="X-NONE" style="color:black">Regulation vs.
Deregulation</span></p>
<p class="BodyText05DS"><span lang="X-NONE" style="color:black">Through
it all there have been two constants: an abundance (ever growing) of
lawyers on both sides of the issues, and the dogged pursuit on the part
of the investment community of marketable financings based on the
regulatory detritus. Out of their joint efforts has emerged what is now
a third constant: the increased emphasis on “project finance,” which
had originally been a natural resource and a real estate financial
technique: the leveraging of developer equity investment in projects by
borrowing against the promise of production of future revenues derived
from offtakes from the projects.</span></p>
<p class="BodyText05DS"><span lang="X-NONE" style="color:black">
Recognition of the potential of legislation to facilitate “good” (<i>i.e.</i>,
support of the favored policy of the moment) project financing has
itself become a relevant criterion for weighting the merits of
legislation, <i>i.e.</i>, what will it do to the ability of private
parties--whether utilities, independent companies, natural resource
producers or sponsoring governments--to raise capital in reliance on the
energy markets?</span></p>
<p class="BodyText05DS"><span lang="X-NONE" style="color:black">A
generation of lawyers has feasted not just on the “policy” arguments
which have shaped various pieces of energy legislation, but also has
parsed the feasibility of applying it on a case-by-case assessment to
the creation of the structured transaction financings. As it were, they
have been ironworkers aloft on construction beams, erecting skyscrapers
capable of swaying, without breaking, under buffeting winds of market
shifts and regulatory change.</span></p>
<p class="BodyText05DS"><span lang="X-NONE" style="color:black">
Recognized, though not emphasized in policy debate, is that facilitating
the competitive advantages of competing fuel sources is what the issue
frequently is about, enhancing the economic choice of one fuel over
another.</span></p>
<p class="BodyText05DS"><span lang="X-NONE" style="color:black">
Certainly many of the debates over the regulation and control of
environmental impacts also have had a significant component of conflict
of fuel selection choices: oil vs. other hydrocarbons, coal vs.
nuclear, natural gas vs. coal, renewables vs. hydrocarbons.</span></p>
<p class="BodyText05DS"><span lang="X-NONE" style="color:black">These
debates have become harsher as costs are de facto legally assigned to
the negative “externalities” of different fuels’ utilization, thus
modifying the economic comparison among them. The pot is further
stirred by the creation of trading markets for these externalities,
markets designed to satisfy newly-created legislative policy goals. The
confluence of these trends since Woodstock--the focus from a project
finance perspective on legislatively based market measures for the
internalization of environmental externalities-- have reached a new
major crescendo with the push for cap-and-trade legislation which has
now cleared the House, although its ultimate passage is in doubt. The
confluence of fuels policy, environmental policy, and project finance
has become a clear reality. </span></p>
<p class="BodyText05DS"><span lang="X-NONE" style="color:black">The
Waxman-Markey bill, for example, may drive market receptiveness to use
of renewables, natural gas, and nuclear--and reluctance to use coal--in
part by its impact on the project finance of the respective competing
fuels and the infrastructure for their delivery. Fortunately, for broad
brush analysis purposes, the basic requirements of successful project
finance are fairly straightforward:</span></p>
<p class="BulletList">
<span lang="X-NONE" style="font-family: Symbol; color: black">�<span style="font:7.0pt "Times New Roman"">
</span></span><span lang="X-NONE" style="color:black">firmness of
contractual arrangements and resulting project revenue streams<br>
</span><span lang="X-NONE" style="font-family: Symbol; color: black">�<span style="font:7.0pt "Times New Roman"">
</span></span><span lang="X-NONE" style="color:black">depth and fluidity
of markets so as to provide risk hedges<br>
</span><span lang="X-NONE" style="font-family: Symbol; color: black">�<span style="font:7.0pt "Times New Roman"">
</span></span><span lang="X-NONE" style="color:black">feasibility of
aggregation of revenue streams from multiple projects and multiple
energy or environment credits</span></p>
<p class="BodyText05DS"><span lang="X-NONE" style="color:black">In
evaluating proposed cap-and-trade legislation, application of those
criteria as they relate to the creation of carbon credits under a carbon
trading scheme, translates into five basic question clusters: </span>
</p>
<p class="BodyTextHanging5SS"><span lang="X-NONE" style="color:black">
1. How can greenhouse projects be structured to maximize the
ability to qualify for the Federal program (or regional and/or state
programs in absence of a Federal program)? Which governmental agencies
and NGO stakeholders will determine the rules for each aspect of GHG
offset credit eligibility and credit trading? Are the definitions and
applicable rules sufficiently definite? Which registries will be
eligible for early action or transitional credit into the mandatory
market?</span></p>
<p class="BodyTextHanging5SS"><span lang="X-NONE" style="color:black">
2. Are GHG credits clearly defined as a marketable commodity,
separate and distinct from the Federal renewable energy and energy
efficiency credits? Does crediting under one program foreclose the
other? How are carbon emission reductions credited (or not) in the
proposed Federal program? </span></p>
<p class="BodyTextHanging5SS"><span lang="X-NONE" style="color:black">
3. Is the possibility of regulatory change in international GHG
credit markets sufficiently accommodated and cushioned by the operation
of the proposed U.S. system?</span></p>
<p class="BodyTextHanging5SS"><span lang="X-NONE" style="color:black">
4. Do the proposed legislation and rules facilitate aggregation
and pooled financing, most notably where there are evolving technologies
and low carbon practices in fields such as forestry, agriculture, and
biomass?</span></p>
<p class="BodyTextHanging5SS"><span lang="X-NONE" style="color:black">
5. As a consequence of the interaction of these and similar
issues, will anticipated price curves for various carbon investments
converge in uniform commodity pricing, or will various sub-markets
develop for different project types? How does one structure a
transaction to reflect this uncertainty? Can counterparty risk be
evaluated in light of uncertainties presented by proposed Federal
legislation and its potential effect on credit portfolios, business
models, and viability?</span></p>
<p class="BodyText05DS"><span lang="X-NONE" style="color:black">Frankly,
candid answers to these questions suggest the existence of practical
obstacles to achieving a fully functional statute. Carbon credit
offsets authorized by the proposed legislation may not serve the related
policy roles they were intended to play,<i> i.e</i>., an expansion joint
to preserve what will be a very structured and potentially costly
cap-and-trade system, unless large volumes of offsets are created, a
“thermostat to control the overall costs of reducing greenhouse gases.”
If they don’t do so, the operability of the entire cap and trade scheme
that would be difficult to correct.</span></p>
<p class="BodyText05DS"><span lang="X-NONE" style="color:black">It’s not
1969 anymore; evaluation of Waxman-Markey from a project finance
perspective is in order, lest the clogged roads leading to Woodstock
becomes a metaphor for the impact of well meaning environmental
legislation on the assurance of a fuel mix which represents a secure
energy supply for the United States.</span></p>
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<p class="MsoBodyText" align="left" style="margin-bottom:0in;margin-bottom:.0001pt;
text-align:left"><font face="Arial" size="2">
<span lang="X-NONE" style="color: black">ROGER FELDMAN, Co-Chair of Andrews
Kurth LLP Climate Change and Carbon Markets Group has practiced law related
to the finance of environmental and energy projects and companies for 40
years. In particular, he has analyzed and executed a wide variety and
substantial value of project financings. He chairs the American Bar
Association’s Committee on Carbon Trading and Finance, serves on the Board
of the American Council for Renewable Energy, and has been a senior official
in the Federal Energy Administration. He is a graduate of Brown University,
Yale Law School and Harvard Business School.</span></font></p>
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