California Energy News Update

California continues to see growth in alternative and clean energy initiatives.  Below is a sample of recent notable developments.

Solar Panels on Every Home Starting 2020

The California Energy Commission (CEC) voted on May 9, 2018 to impose additional energy efficiency building standards, including the requirement that starting in 2020, new homes (with some exceptions) have solar panels.  The CEC hopes this will cut energy use in new homes by 50%, and claims that this additional building standard will reduce greenhouse gas emission by an amount equivalent to removing 115,000 fossil fuel cars off the road.  While environmentalists and building associations have hailed this decision as ground-breaking, others called it “admirable but misguided” because of the potential to exacerbate power grid operation and efficiency issues.

California Invests in the Electrification of Transportation

In working toward the mandated clean air and greenhouse reduction goals for 2030, the California Public Utilities Commission (CPUC) on May 31, 2018 committed to invest $738 million in transportation electrification projects to be implemented by the state’s electric utilities. CPUC authorized the state’s utilities to implement projects to expand residential, workplace and public electric vehicle charging stations. The majority of the funds ($578 million) are allocated to building out the infrastructure and providing rebates to support the electrification of medium- or heavy-duty commercial vehicles.  This action is part of Gov. Jerry Brown’s goal of having  5 million zero-emission vehicles on the road by 2030, given that transportation accounts for 40% of California’s greenhouse gas emissions.

A Floating First: California Offshore Wind Projects

In 2015, Trident Winds, Inc. (Trident) approached the city of Moro Bay, California regarding a $3.2 billion plan to build 100 floating wind turbines approximately 35 miles off the coast of Moro Bay with a grid connection in Moro Bay.  While Moro Bay has yet to approve the project, German energy company Energie Baden-Württemberg AG (EnBW) has entered into a joint venture with Trident to advance the Moro Bay project.  Other California cities have advanced similar projects.  Following a request for qualification process in April this year, California’s Redwood Coast Energy Authority (CRCEA) selected a floating offshore wind solution for a project 20 miles off the Northern California Coast near Eureka. The CRCEA and the selected consortium of companies (comprised of Principle Power Inc., EDPR Offshore North America LLC, Aker Solutions Inc., H.T. Harvey & Associates and Herrera Environmental Consultants Inc.) are currently in the process of finalizing a public-private partnership agreement to  work toward designing and building this project.

Bill on Control of California’s Power Grid Survives Key Votes

On June 19, 2018 and June 27, 2018, California’s Senate Energy and Communications and Senate Judiciary committees voted in favor of AB-813, a bill backed by Governor Jerry Brown which would transfer control of California’s power grid from the California Independent System Operator (Cal-ISO) to a regional operator.  As a result, the regional operator would be governed by a multi-state board that answers to federal regulators (i.e., FERC) rather than the governor of California who currently appoints the governing board of Cal-ISO.  Supporters argue that consumers will save money, as much as $1.5 billion a year, and that there will be wider distribution of electricity generated by renewable sources.  In contrast, opponents believe that this law would undermine California’s environmental policy by exposing California’s environmentally-friendly laws to federal preemption legal challenges (which, have occurred and succeeded in other states that have regionalized their grids), and also force Californians to purchase energy from fewer clean sources, produced in neighboring states such as Utah, Colorado, Wyoming and Arizona.  The bill now advances to the Senate Appropriations Committee.

 

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Covington continues to stay abreast of these developments and others around the country and globe to best advise its clients.

New EU Requirements on Products Containing REACH Candidate List SVHCs

The European Union has adopted a new obligation on suppliers of articles that contain substances listed in the REACH Candidate List of SVHCs in concentrations above 0,1% to submit a notification to the European Chemicals Agency (“ECHA”).  The new requirement is intended to facilitate the recycling of products and was introduced by a new Directive amending the EU Waste Framework Directive.

The new notification requirement will apply as from January 5, 2021 to all producers, importers, distributors and retailers of a wide variety of articles, such as toys, paper products, electronic devices, vehicles, packaging, medical devices, and apparel. The requirement is not subject to any volume threshold, and is also likely to apply where the component (article) of a complex article (e.g., computer) contains a Candidate List substance in concentrations above 0,1%.

The new requirement is in addition to the notification, supply of information and prior authorization requirements that the EU REACH Regulation already imposes on Candidate List substances.

The REACH Candidate List of Substances of Very High Concern for Authorization

The EU REACH Regulation requires ECHA and the European Commission to list “substances of very high concern” (“SVHCs”) in the Candidate List of SVHCs for Authorization.  SVHCs may include substances identified as: (i) meeting the criteria for classification as Cat. 1A and 1B carcinogens, mutagens, or toxic to reproduction substances; (ii) persistent, bioaccumulative and toxic (“PBTs”); (iii) very persistent and very bioaccumulative (“vPvBs”); and (iv) substances, such as endocrine disrupters, for which there is scientific evidence of probable serious effects to human health or the environment that give rise to a level of concern equivalent to that of Cat. 1A and 1B CMRs, PBTs, and vPvBs and that are identified on a case-by-case basis.  Listed SVHCs are candidate substances to be included in Annex XIV to the REACH Regulation as substances subject to a prior authorization.

The Candidate List is updated twice a year and already contains 191 substances.

The New Notification Requirement and ECHA Database

The newly adopted Directive amending the Waste Framework Directive requires Member States to adopt legislation to ensure that suppliers of articles in the EU/EEA notify ECHA if their articles contain Candidate List substances in concentrations above 0,1%.  It also requires ECHA to create a database with the information received.

First, all suppliers of articles in the EU/EEA will have to provide ECHA with information to allow the “safe use” of the article if it contains a Candidate List substance in concentrations above 0,1%.  In particular, the amending Directive requires Member States to “ensure that any supplier of an article [as defined in the REACH Regulation] provides the information pursuant to Article 33(1) [of the REACH Regulation] to the European Chemicals Agency as from 5 January 2021.”  In turn, Article 33(1) of the REACH Regulation states that “any supplier of an article containing a substance [included in the Candidate List] in a concentration above 0,1% weight by weight (w/w) shall provide the recipient of the article with sufficient information, available to the supplier, to allow the safe use of the article including, as a minimum, the name of the substance” (emphasis added).

The REACH Regulation defines an article as “an object which during production is given a special shape, surface or design which determines its function to a greater degree than does its chemical composition.”  In effect, this definition includes any object.  The Court of Justice of the European Union has held that, in the case of complex articles (i.e., articles composed of different articles/components), the REACH obligations apply to each of the articles contained in the complex article.  For example, where a computer contains a component with a Candidate List substance, the concentration must be calculated on the basis of the weight of the component and not of the computer.  The new notification requirement should not apply to the import or supply of waste as the REACH Regulation states that waste is not an article.

Second, the amending Directive requires ECHA to establish by January 2020 a database with the information received from notifying suppliers. This database must be available to waste treatment operators, and to consumers upon their request.   Member States and EU authorities are also likely to use the database to gather information to support their proposed restrictions and other measures on articles containing SVHCs.  For example, information contained in the database could be used as evidence to regulate under specific product legislation, such as the EU RoHS Directive.

The Need for National Implementing Legislation and ECHA Guidance

The amending Directive’s new requirement to notify ECHA, must be implemented into the national laws of the different Member States of the EU/EEA in order to be enforceable on suppliers.  The Directive requires Member States to adopt the necessary implementing legislation by July 5, 2020. In any event, the national implementation should be in force by January 5, 2021 when the notification requirement should start to apply.

There is the risk that the actual details of the notification may vary per Member State, and that the obligation to notify will not apply as from January 2021 to suppliers established in those Member States that are delayed in the adoption of their national implementing legislation. Thus, during the next months, ECHA and the European Commission are likely to work with Member States on the adoption of guidance with the aim of ensuring a harmonization of the notification details.

Among other details, European authorities are likely to consider the following:

  • Who should notify? The notification obligation applies to “any supplier of an article,” which may include any producer, importer, distributor and retailer, including online sellers, of articles containing Candidate List substances above the concentration threshold.  This is because the REACH Regulation defines a supplier of an article as “any producer or importer of an article, distributor or other actor in the supply chain placing an article on the market.”  The Regulation also defines “placing on the market” as any “supplying or making available” to a third party, including import.

However, it is unclear whether suppliers down the supply chain (e.g., retailers) will be required to submit a notification when the same article has already been notified by a supplier up the supply chain (e.g., importer).  Moreover, given that the notification obligation will be established in the national laws of the different Member States, it is also unclear whether actors down the supply chain will be exempted from notification if upstream suppliers in other Member States have already notified.

  • What should be notified and how? The amending Directive requires suppliers to provide ECHA with information available to allow the safe use of the article, but does not specify what details should be notified or the format and mechanism of such notification.  The notification could include the identity of the supplier, the SVCH, the article, and  “safe use” information, but Member States could impose different information requirements unless there is some harmonization.  In any event, suppliers should only be required to supply information that they have “available.”

In order to allow ECHA to run its database, Member States should also agree on the use of a common notification format and procedure.

  • What is information to allow the “safe use of the article”? In particular, the Commission, ECHA and Member States will have to agree on what constitutes information “to allow safe use of the article.” At a minimum, this information should include the name of the SVHC, but Member State could also require other information, such as the concentration threshold and routes of environmental and human health exposure.
  • How will confidentiality be protected? Past practice with other EU databases suggests that many consumer requests for access are in reality from competitors. Depending on the level of information that will have to be notified, authorities could agree to grant confidentiality to some information, or to only grant access to detailed information to registered waste treatment operators.

Existing REACH Obligations on Candidate List Substances

The new obligation on suppliers of articles to notify ECHA if their articles contain Candidate List substances in concentrations above 0,1% is in addition to the following already existing REACH obligations on Candidate List substances:

  1. Obligation on producers and importers of articles containing Candidate List substances in concentrations above 0,1% to notify ECHA if the all of the following thresholds are met: (i) the substance is present in the articles in quantities of one ton per producer or importer per year; (ii) the substance has not been registered for the use in the article by any other party; and (iii) the producer or importer cannot exclude exposure to humans or the environment during normal or reasonable foreseeable conditions of use of the article, including disposal.
  2. Obligation on suppliers to provide a safety data sheet to professional customers of Candidate List substances or mixtures containing them.
  3. Obligation on suppliers to provide professional customers of articles with information allowing for the safe use of the articles if they contain Candidate List substances in concentrations above 0,1%. Suppliers are also required to provide the same information to consumers if they request it.
  4. Candidate List substances may also be included in Annex XIV to the REACH Regulation as subject to prior authorization. This prior authorization requirement applies to producers, users and importers of the substances and mixtures containing them in concentrations above a specific threshold (g., 0,1%).  It applies to producers using Candidate List substances and mixtures containing them to manufacture articles in the EU/EEA, but not to importers of articles manufactured in third countries.

More information on the different REACH requirements can be found here.

European Commission Launches New Antitrust Investigation into LNG Destination Clauses

On June 21, 2018, the European Commission (“Commission”) started a new investigation to determine whether so-called destination clauses in Qatar Petroleum’s liquefied natural gas (“LNG”) supply contracts with European buyers infringe the European Union (“EU”) antitrust rules. Continue Reading

The Roggeveld Wind Farm in South Africa

On 4 April 2018, Covington’s client Building Energy, a multinational company operating in the renewable energy industry, signed a power purchase agreement (PPA) with the South African state owned utility Eskom Holdings SOC Ltd (Eskom) to build, own and operate a 147 MW wind plant in Roggeveld (on the border of the Western and Northern Cape provinces of South Africa). Building Energy had been awarded preferred bidder status under Round 4 of the South African Department of Energy Renewable Independent Power Producer Procurement (REIPPP) programme for the wind project in April 2015. The Roggeveld wind farm will generate around 613 GWh per year and the energy generated will provide energy to 49,200 households every year, while avoiding the emission of about 502,900 tons of CO2 emissions. Construction work is scheduled to begin in 2018 and the commercial operation date is foreseen to be in April 2021. Matteo Brambilla (Building Energy’s Managing Director for Africa and the Middle East) commented “We are delighted to have signed the agreement in the presence of Minister of Energy of South Africa, for the construction of the Roggeveld plant, which represents our first wind farm in South Africa. We are also excited to develop two of the 2.3GW of renewable energy projects allocated by South African Government in the first major investment deal under President Cyril Ramaphosa”.

The REIPPP programme was implemented to assist the development of the renewable energy sector and encourage private investment in South Africa. The national renewable energy target is for 18,800MW to be supplied by renewable energy by 2030. Furthermore, the programme is designed to contribute to developing foreign investment, socio-economic and environmentally sustainable growth. The REIPPP programme has already delivered 5,243 MW in the space of four years, projects covered by the programme mainly consist of solar photovoltaic, concentrated solar power, biomass, landfill gas, small hydropower and biogas. A large spectrum of funding mechanisms have been utilised, ranging from a variety of foreign private equity, local private equity and large commercial and development banks. Some of the funding is composed of local private equity funds for black economic empowerment purposes to represent surrounding communities. The so-called “Broad Based Black Economic Empowerment” (B-BBEE) legislation is a central part of the South African government’s economic strategy. The B-BBEE policies are an enabling framework that allows government to implement a standard framework for the measurement of B-BBEE across all sectors of the economy. The aim is to increase the number of black individuals that manage, own and control the country’s economy, and to decrease racially based income inequalities. In public sector projects, achieving B-BBEE goals is a significant evaluation criterion.

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State Investments in Electric Vehicle Charging Infrastructure

Various studies indicate that an overall lack of charging infrastructure serves as an impediment to the widespread adoption of electric vehicles (EVs). However, the road to transportation electrification is officially under construction following several major state investments.

At the end of May, in the largest single state-level investment in EV charging infrastructure, the California Public Utilities Commission (CPUC) approved more than $760 million worth of transportation electrification projects by the State’s three investor-owned utilities. The CPUC’s Decision, See A.17-01-020, Proposed Decision of ALJs Goldberg and Cook (May 31, 2018),  authorized Pacific Gas and Electric Company (PG&E) and Southern California Edison (SCE) to install vehicle chargers at more than 1,500 sites supporting 15,000 medium or heavy-duty vehicles. The FD also approved rebates to San Diego Gas & Electric (SDG&E) residential customers for installing up to 60,000 240-volt charging stations at their homes. Moreover, PG&E was authorized to build 234 DC fast-charging stations.

Besides the total spend and resulting emissions reductions represented by the Commission’s action, the Proposed Decision is also notable for the policy priorities it advances.  For instance, it clearly prioritizes the creation of electrification-related benefits for California’s disadvantaged communities (DACs).  (The authorizing legislation, SB 350, found that “[w]idespread transportation electrification requires increased access for disadvantaged communities . . . and increased use of [EVs] in those communities . . . to enhance air quality, lower greenhouse gases emissions, and promote overall benefits to those communities” § 740.12(a)(1)(C) (De Leon)).  Accordingly, the CPUC focused on promoting construction of charging infrastructure in DACs.   For example, the PG&E fast charging program will target construction in DACs by providing up to $25,000 per DC fast charger in rebates to cover a portion of the charger cost for sites located in DACs.

The CPUC also prioritizes the survival of non-utility charging competition.  For example, the Proposed Decision eliminates utility ownership of the charging infrastructure on the customer side of the meter in the SDG&E residential charging program. Additionally, for the PG&E and SCE’s medium and heavy-duty programs, the utilities will own make-ready infrastructure, but not the Electric Vehicle Supply Equipment (EVSE). Instead, the utilities will allow customers to choose their own EVSE models, EVSE installation vendors, and any network services providers.

The CPUC noted several benefits of allowing the utility to own electrification infrastructure only up to the point of the EVSE stub.  First, the Commission found that “[u]tility ownership of the charging infrastructure dramatically drives up costs, in comparison to alternative ownership models.” Instead, restricting utility ownership of charging equipment will allow more charging infrastructure to be built at the same (or lower) cost to ratepayers. Second, it allows private parties to compete and innovate, which will improve charging technology and lower costs. Lastly, non-utility competition addresses “stranded cost” fears, since private parties will bear the risks of nascent charging technologies.

While California has made the largest commitment, other states have also joined the effort to pave a national road toward the widespread adoption of EVs.

In New Jersey, utility company PSE&G recently proposed spending $300 million to set up a network of up to 50,000 charging stations. This investment would constitute a massive upgrade to New Jersey’s charging infrastructure, which currently consists of less than 600 charging stations according to U.S. Department of Energy data. The proposed investment is part of a larger $5.4 billion expansion in PSE&G’s five-year infrastructure plan, and represents the first major proposal of New Jersey’s largest utility to invest in EV infrastructure.

In New York, Governor Andrew Cuomo announced a $40 million commitment (that could grow to $250 million by 2025) by the New York Power Authority for its EVolve NY initiative. The new funding will be used to build fast chargers and to support EV model communities. EVolve NY is a part of the broader Charge NY 2.0 initiative, which advances electric car adoption by increasing the number of charging stations statewide. The new funding will aid New York as it aims to meet its particularly ambitious goal of 800,000 electric vehicles on the road by 2025.

Late last year, the Massachusetts Department of Public Utilities approved a $45 million charging station program by local utility, Eversource. The program includes investments to support the deployment of almost 4,000 “Level 2 Stations” and 72 DC Fast Charging stations. Even more investment could be on its way to Massachusetts as utility company National Grid has also proposed investing in charging station infrastructure.

And in Maryland, utility companies have proposed spending $104 million to build a network of 24,000 residential, workplace and public charging stations. The program, currently before the state’s Public Service Commission, would be a major part of Maryland’s effort to reach 300,000 electric vehicles on the road by 2025.

On the federal level, energy-related projects could be eligible for the $20 billion “Transformative Projects Program” announced by the Trump administration in February.  However, President Trump recently remarked that his infrastructure plan will likely have to wait until after this year’s midterm elections.  In the meantime, states have shown that they are more than willing to take the lead in investing in transportation electrification infrastructure.  (In related news this week, Colorado’s decision to move toward adopting California’s greenhouse gas emissions standards for light-duty vehicles represents a parallel and noteworthy development, further indicating leadership and action from states focused on developing advanced vehicle technology.)  It’s also notable that in addition to utility commission activity, states are also expressing support for advanced vehicle technology While the states have certainly taken a lead, their investments also complement significant action in the private sector, including the recent effort to stand up the Transportation Electrification Accord.  See our recent post on that subject, and continue to follow Inside Energy and Environment for continued updates on this subject.

Industry is Leading the Way on Transportation Electrification

On June 19th, a group of diverse businesses from a variety of industries announced the formation of the Transportation Electrification Accord (“Accord”). This announcement signaled an increasingly firm consensus around the importance of open, resilient, and cooperative approaches to transportation electrification — and major companies and organizations, some of whom have not previously been active in this realm (such as the Edison Electric Institute, Southern Company, AEP, GM, and Honda) have come together around this effort.

The Accord’s announcement comes at a time of intense dynamism in this industry.

On May 31st, the California Public Utilities Commission authorized more than $760 million worth of transportation electrification projects by the State’s three investor-owned utilities. This Commission action illuminates the arc of an inflection point along the history of transportation technology: regulated utilities can expect to earn a rate of return as providers not just of power, but now, of fuel. (More on the significance of this and similar state-level developments in our recent post.)

Utility companies’ participation in such projects — widely viewed as a major opportunity for businesses that are otherwise facing decreased demand for electricity (i.e., energy efficiency) and disruption from distributed energy resources (see, e.g., Puente Power Plant) — echoes recent announcements from the auto industry. GM, for example, plans to produce more than twenty new electric vehicle models by 2023; Ford has committed to spending nearly $10 billion on EVs by 2020; and Volvo has plans for 50% of its sales to be fully electric by 2025. Tesla, for its part, continues to ramp up production of its mass market vehicle, the Model 3, and was recently the subject of a report that indicates its economic contribution to California alone has been worth more than $5 billion.

As the market heats up, new demand for EVs will raise a number of questions, relating to public policy, law, regulation, finance, and technology. Presumably, that is what motivated the major environmental groups, utility companies, car companies, and various other parties to sign onto the Accord.

The Accord’s signatories will commit to the advancement of “an equitable, prosperous and electrified transportation future” by developing cooperative approaches that draw on participants’ expertise and experience along the value stream. It seeks to provide internal accountability and to shape a framework for coordination — from OEMs to electric charging providers to consumers — across the industry. We’ll be keeping tabs on the Accord, on this blog, as we continue to monitor developments in the electric and autonomous vehicles space.

Covington CleanEquity Conversations: Will Market Driven Innovation Alone Save Us from Climate Change?

On March 8-9, 2018, a bespoke group of approximately 200 leading entrepreneurs, investors and advisors focused on deploying and commercializing cutting edge technologies gathered in Monte Carlo from across the globe for the 11th annual CleanEquity® Monaco Conference.  Complementing other plenary sessions and emerging company presentations, the conference initiated a new feature — Covington CleanEquity Conversations — intended to capture and memorialise the unique thought leadership opportunity presented by the gathering in Monaco. On the first day, conference participants separated into three breakout groups for Chatham House Rule discussions curated by partners from the international law firm Covington & Burling LLP of three critical issues confronting cleantech deployment and commercialisation:

  • AI and IoT – Benefits, Risks, and the Role of Regulation
  • Sustainability – What goals should businesses prioritise and what are the right metrics?
  • Will market driven innovation alone save us from climate change?

On the second day, the Covington team reported in the conference’s final plenary session key takeaways from the three breakout group discussions.  Covington and CleanEquity organizer and specialist investment bank, Innovator Capital, are pleased to share brief summaries of the thought leadership developed by the proceedings of conference participants on each of the three topics.

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Will Market Driven Innovation Alone Save Us from Climate Change?

This loaded question, perhaps more than the other two topics debated during the Covington-led sessions at CleanEquity, presents a fundamental challenge facing society.  The range of answers helps to inform the commercialization opportunities for the myriad technologies under development by CleanEquity’s presenting companies.  Each of the presenting companies offers some partial solution to climate change by making a process more energy efficient or sustainable.  But the solutions presented were generally early stage.  In order for these companies and their technology-driven solutions to thrive and be impactful, they need to have the right combination of receptive markets, appropriately costed capital for expansion,  and sustainable consumer adoption.

In a session led by Covington’s Scott Anthony, a partner in the firm’s Silicon Valley office, conference participants grappled with two aspects of the overall question:

  • Will technology innovation progress fast enough to overcome the effects of climate change?
  • Is the threat of climate change alone sufficient to incentivize society to find a solution?

The robust discussion benefited from the views of a diverse group of innovative entrepreneurs, investors and consultant thought leaders, but no government officials.

The Pace of Innovation is Quick, but Commercialization is Lagging 

The initial position asserted by the first speaker was that innovation had, in effect, already progressed quickly enough because the technology necessary to overcome climate change already existed.  Another individual agreed and noted that within the Conference alone, many technologies had the potential to mitigate or overcome the effects of climate change.  Several individuals commented that it would not be one single technology or sector, but rather a combination of technologies across many spaces that are deployed at a commercial scale that will be needed.  The group acknowledged the potential for wide deployment of solar power to mitigate climate change, but also recognized that there were many technologies that were part of the solar ecosystem or that would be able to take advantage of greener electricity.  The group also broadly agreed that the solutions went beyond just solar and included energy efficiency of all types as well as wind and alternative fuels.  In addition to energy generation, it was noted that technologies for more sustainable food production, waste disposal, packaging, transportation and energy transmission and management would be essential to effectively combating climate change.  Companies with potentially commercializable solutions in each of these industry sectors were present at the conference.

While the group agreed regarding the existence of potentially viable technologies, the group also observed that all of the new technologies face the common challenge of market acceptance and adoption.   New technologies struggle to compete with existing technologies and to overcome barriers to widespread adoption that threaten their existence.  Commercialization was viewed as the key and impediments to commercialization were discussed as a critical issue.  One person commented that improper or inadequate pricing of carbon emissions generated through the use of traditional technologies adversely impacts the adoption and commercialization of new technologies.  Once the externalities of carbon emissions are taken into account, the group felt that newer technologies would have the potential to be more economically competitive and thereby more readily adopted at a meaningful scale.

Threat of Climate Change Alone is Not Sufficient to Produce Necessary Innovation — Government Intervention is also Needed

One might have expected a gathering of entrepreneurs and investors to favor a free market approach where the best technologies and businesses thrive and profit on their own merits.  Investors are reluctant to risk their capital on the basis of government policies that are subject to change.  Nonetheless, the group coalesced around the view that the threat of climate change alone would not be enough and that market intervention by governments would be required to assure that effective technologies are adopted at scale.

One person commented and others agreed that without government intervention, society would not be able to achieve near or long term climate change goals.  Without discussion of specific government policies, the group acknowledged that the general goal of policies should be to enable climate friendly technologies to achieve commercialization and to compete with existing legacy technologies.  Complexity of determining the “right” policies was recognized, but the goal remained.  The discussion noted that different areas and countries would have and need different policies and incentives.  There is not a one-size fits all set of policies.  But the need for governments to play an enabling role was widely accepted.

One person commented that human behavior is very difficult to change.  People and societies have established practices that tend to be reinforced by established incentives.  Overcoming the inertia of existing regulations and practices requires effort.  Without new and different incentives, mandates or other factors driving behavior change, it is likely that established norms and practices  would continue to prevail.  For example, one commentator raised the question of how many people attending the conference used renewable energy in their home or drove hybrid or all electric vehicles.  For such an economically advantaged and highly educated segment of the population at the forefront of technology and well aware of the dangers of climate change, the number  was remarkably low.  A participant noted that some individuals do not necessarily see the need to make personal sacrifices when the various state actors are not in agreement as to national and international policies regarding climate change.  Another participant asserted that perception of the need for change is lagging behind the actual need for change.  There was general agreement that society did not feel the pressing need to change current behavior.  Another person suggested that the climate needed the equivalent of a “#metoo” movement to raise awareness and galvanize action.  Something that motivated people to reflect on their own actions, call out the bad actors and to change the conversation.  One commenter offered that rational arguments have not been sufficient to change behavior, climate conscious behavior needs to become more recognized as the “right” thing to do if people are to change their behavior.

Shifting the discussion to the role of governments in changing behavior, the group agreed that concerted international efforts involving all nations would be important.  One commenter suggested that so long as some countries and peoples could continue to deploy old technologies and practices, other countries would not have an incentive to adopt and pay for new technologies and practices.  It is the collective action problem on a global scale.  Another participant  noted that many political leaders lack the political will or desire to adopt climate friendly policies.  The group generally acknowledged there were and are many reasons for the lack of political will, but still faulted political leaders for failing to lead in an area that is so critical.  One participant observed that the political will of the leaders is influenced by the absence of a clear mandate from their citizens.  Another commented that part of the problem is the portrayal of climate issues in the media.  Popular media was credited with the power to help shape and influence the perception of the need for change and thereby the mandate of politicians.  While the media’s role was viewed as important, one participant brought it back to a failure of leadership at the highest levels.

Amplifying this thought, another participant suggested that the nature of democratic societies was partially to blame for the paralysis of political leaders.  The clash of various constituents and interest groups all seeking to influence the system invariably leads to a slower process as incumbents who are threatened by new technologies and business practices are economically incented to slow the pace of competing change.  These competing voices are reflected in the political system.  The group then discussed the success of Germany in adopting solar energy through a program of incentives and targets and that Germany succeeded in this effort despite initial skepticism.  Some of that success was attributed to German citizens wanting to “do the right thing” and adopt solar.  Another important factor was the government’s commitment.  The group then compared Germany’s success with the development of solar energy in China.  The group generally acknowledged that China, because of the government’s ability to control its economy, had the ability to mandate change more rapidly and broadly than any Western government.  Some participants expressed admiration for China’s ability and willingness to establish specific targets and to execute on plans to achieve those targets.  There was general acknowledgement, however, that China’s ability stems from the government’s control of Chinese society in general.  Nobody in the group advocated that Western governments be more like China.   But there was a desire for Western governments to take more of a leading role in promoting climate friendly policies and helping to solve the problem of getting climate friendly technologies to market.

Conclusion

The conversation covered many issues and raised important questions and observations.  A consistent theme throughout the conversation was the need for governments to take a leading role in promoting climate friendly technologies.  Only governments would have the ability to adopt policies that will cause enough behavior to change.  Which specific policies and behaviors were beyond our group, but it was clear that the group believed that while the technology exists to combat climate change, government action will be required to facilitate adoption and commercialization of that technology.

Covington Hosts 14th Annual Environmental Transactional Roundtable

Covington hosted the 14th Annual Environmental Transactional Roundtable on May 18, 2018. More than 70 attorneys attended, including from multiple countries outside the U.S., representing 31 law firms and organizations. The event was a great success, and featured panel discussions that sparked lively discussion among participants. The three panels covered product stewardship issues, environmental issues in bankruptcy, and risk management in transactions.

Both co-chairs of Covington’s environmental group, Cándido García Molyneux and Don Elliott, spoke as panelists, joined by eight other practitioners from other firms.  Candido spoke about developing product stewardship and chemical regulation issues in the EU, including the complex rules related to carcinogenic, mutagenic or toxic for reproduction (CMR) substances, bans on consumer products, amd Registration, Evaluation, Authorisation and Restriction of Chemicals (REACH) registrations and authorizations.  He also discussed significant requirements for transactions involving products with the CE (Conformité Européene) mark and the Nagoya Protocol rules on biological diversity.

Don Elliott discussed best practices in environmental due diligence, including risk management strategies and effective methods for law firms to memorialize the scope, results and client communication of such due diligence.

The Roundtable is an annual gathering at which panels of practitioners meet to discuss current environmental issues and trends in transactional work.  This year was Covington’s first time hosting the event, which has been organized in the past by other leading national law firms.   Past Roundtables have featured discussion of sustainability reporting, climate change liability and disclosures, insurance developments, and lessons from major environmental disasters.

 

Featured:  Cándido García Molyneux discusses product stewardship developments in the EU.

European Commission Proposes Marketing Restrictions on Single Use Plastic Products

Citing a responsibility to tackle the problem of marine litter originating from Europe, on May 28, 2018, the European Commission presented a proposal for a Directive on Single Use Plastic Products that if adopted will restrict and increase the costs of marketing different categories of single use plastic products and fishing gear containing plastic.  Many plastics, such as polypropylene, are produced from petroleum derivatives.  The proposal is one of the main measures that the Commission announced in its Strategy for Plastics in a Circular Economy and is mainly intended to address plastic marine litter in oceans and seas.

Under the Strategy for Plastics in a Circular Economy, the European Chemicals Agency is also considering the restriction of microplastic particles intentionally added to preparations, such as cosmetics, and the use of oxo-degradable plastics.  In addition, the Commission is contemplating measures for microplastics not intentionally added but generated during the use of products, such as tires and textiles.

Separately, the European Commission recently proposed the adoption of a Member State contribution to the EU budget of 0.80 Euro per kilogram of plastic packaging waste that is not recycled, which could raise around 7 billion Euro a year.

Single Use Plastic Products

The proposal claims to focus on the ten most found single use plastic products that wash up on European beaches as well as fishing gear, which together represent around 70% of marine litter items by count.  It targets single use plastic products even if they are recyclable.  Its scope includes food containers; cups for beverages; cotton bud sticks; cutlery, plates, stirrers, and straws; sticks for balloons; balloons; packets and wrappers, beverage containers; bottles; tobacco product filters; wet wipes and sanitary towels; lightweight plastic carrier bags; and fishing gear.

The proposal defines plastic as “material consisting of a polymer [as defined in the EU REACH Regulation] to which additives or other substances may have been added, and which can function as a main structural component of final products, with the exception of natural polymers that have not been chemically modified.”  This definition is intended to cover polymer-based rubber items and bio-based and biodegradable plastics independently of whether they are derived from biomass and/or intended to biodegrade over time.

The proposal tries to encourage a circular economy by defining a “single use plastic product” as a product “made wholly or partly from plastic and that is not conceived, designed or placed on the market to accomplish, within its life span, multiple trips or rotations by being returned to the producer for refill or re-use for the same purpose for which it was conceived.”

Different Requirements and Bans for Different Categories of Products

The proposed Directive would impose different types of measures on different categories of single use plastic products.  The Commission claims that this differentiated approach takes into account whether there are alternative materials available, the added value of EU action, and its complementarity with the actions of the Member States.  In effect, the legal basis of the proposal (i.e., Article 192(1) of the Treaty on the Function of the European Union) does not prevent Member States from imposing additional or stricter requirements provided that they can be justified as necessary and proportionate.

The proposal would:

  1. Ban the placing on the EU/EEA market of plastic cotton bud sticks, cutlery, plates, straws, beverage stirrers, and sticks to be attached or to support balloons.
  2. Impose a 90% separate collection target for waste of plastic bottles, by means of deposit-refund schemes, or separate collection targets for relevant extended producer responsibility schemes.
  3. Impose extended producer responsibility schemes for fishing gear containing plastic and plastic food containers, packets and wrappers of food intended for immediate consumption, beverage containers, cups for beverages, tobacco products with filers, wet wipes, balloons, and lightweight plastic carrier bags. Producers of single use plastic products would have to pay for the collection, transport and treatment of their waste as well as for the cost of clean up litter and of public awareness campaigns.  This extended producer responsibility would be in addition to the obligations that the EU Packaging and Packaging Waste Directive already imposes on producers of plastic packaging.
  4. Ban the marketing of beverage containers with caps and lids that do not comply with specific environmental design requirements. In particular, the caps and lids would have to remain attached to the container during its intended use.  These design requirements would be further detailed through harmonized technical standards developed under an European Commission mandate.
  5. Impose marking requirements on sanitary towels, tampons, tampon applicators, wet wipes and balloons. These products would have to bear a mark informing consumers of the product’s appropriate waste disposal options, the negative environmental impacts of littering or other inappropriate waste disposal, and/or the presence of plastics in the product.
  6. Require Member States to take measures to reduce significantly the consumption of plastic food containers and cups. Those measures may include national consumption reduction targets, prohibiting the free supply of the products, or requiring the availability of reusable alternatives at point of sale.  A Directive on Reducing the Consumption of Lightweight Plastic Carriers Bags imposes on Member States similar reduction consumption targets with respect to lightweight plastic carrier bags.
  7. Require Member States to adopt environmental awareness raising measures for fishing gear containing plastic and plastic food containers, packets and wrappers, beverage containers, cups, tobacco products with filters, wet wipes, balloons, lightweight plastic carrier bags, and sanitary towels, tampons and tampon applicators. Member States would have to ensure that consumers are informed of the available re-use systems and waste management options for the products and the impact of littering and other inappropriate disposal.

The proposal also grants environmental NGOs a right of legal redress.  These NGOs may challenge in national courts decisions, actions or omissions of Member State authorities concerning the marketing ban, environmental design requirements, marking requirements and extended producer responsibility schemes mentioned above.  Individuals and other groups would also have a right of legal redress if they can show that they have a sufficient interest, or they maintain the impairment of a right where the relevant Member State requires this as a precondition.  This is probably the first time that an EU Directive imposing environmental requirements on products explicitly grants environmental NGOs a right to request compliance with the Directive’s requirements in national courts.

Next Steps

The European Parliament and Council must now consider the proposal for its adoption through the so-called “ordinary legislative procedure.”  Through that procedure the Parliament and Council may modify the proposal, including  to impose stricter requirements or to subject additional categories of plastic products to the proposal’s different requirements and bans.

Typically, the ordinary legislation procedure takes at least 16 months and may be extended to up to three years.  Nevertheless, the Parliament and Council may try to adopt the proposal before the EU parliamentary elections in May 2019.

Covington CleanEquity Conversations: AI and IoT – Benefits, Risks, and the Role of Regulation

On March 8-9, 2018, a bespoke group of approximately 200 leading entrepreneurs, investors and advisors focused on deploying and commercializing cutting edge technologies gathered in Monte Carlo from across the globe for the 11th annual CleanEquity® Monaco Conference.  Complementing other plenary sessions and emerging company presentations, the conference initiated a new feature — Covington CleanEquity Conversations — intended to capture and memorialise the unique thought leadership opportunity presented by the gathering in Monaco. On the first day, conference participants separated into three breakout groups for Chatham House Rule discussions curated by partners from the international law firm Covington & Burling LLP of three critical issues confronting cleantech deployment and commercialisation:

  • AI and IoT – Benefits, Risks, and the Role of Regulation
  • Sustainability – What goals should businesses prioritise and what are the right metrics?
  • Will market driven innovation alone save us from climate change?

On the second day, the Covington team reported during the conference’s final plenary session key takeaways from the three breakout group discussions.  Covington and CleanEquity organizer and specialist investment bank, Innovator Capital, are pleased to share brief summaries of the thought leadership developed by the proceedings of conference participants on each of the three topics.

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AI and IoT –  Benefits, Risks, and the Role of Regulation

  • Rapid evolution and proliferation of artificial intelligence and the Internet of Things holds tremendous promise for dramatic, transformational efficiency gains in nearly every industry.
  • At the same time these technologies present risks of massive employment disruption, losses of privacy and yielding of human free will to decisions made by algorithms and machines.

In a session led by Covington’s Corporate Partner Simon Amies, conference participants examined these propositions and then considered two questions:  Where should regulation step in?  Can regulation be effective to manage the risks without diminishing the benefits?

The Benefits

There was universal agreement that evolution and proliferation in AI and the Internet of Things have the potential to bring transformational efficiency gains across virtually all sectors of industry.  AI has already transformed business models in the technology sector through the deployment of sophisticated algorithms to process vast quantities of data, and machine learning and automation are already being utilized on a large scale in other areas of industry, revolutionizing processes and delivering significant efficiency gains.

A number of the presenting companies noted that artificial intelligence already plays a pivotal role in their businesses, with some utilizing the technology at the heart of their business model — one company uses its machine learning system to manage and optimize grid operations — and others use AI as a tool to enhance research and refine product development.  One participant flagged the fundamental change to supply chain dynamics and manufacturing processes with the emergence of the smart factory in the Industry 4.0 model, leading to increased efficiency, reduced costs and maximization of resources.  Mass-customisation of lower-cost goods manufactured to order in close proximity to the market bring reduced shipping costs and lead times.

The Risks

But as often happens with the adoption of disruptive technology, new and often unforeseen risks and challenges emerge.

One participant noted concerns surrounding access to, control and ownership of personal data in the field of healthcare with the focus on development of personalized and precision medicines.  Another flagged how personal data could be used by employers to make hiring decisions or by insurers to price auto or life policies, but without explicit consent from the individuals.

One participant pointed to the safety and security concerns of having automated intelligent systems replace humans at the controls of cars and other machines and equipment.  In the case of the autonomous vehicle, who is responsible in the event of an accident where the system makes a conscious decision which turns out to be the wrong one, causing a fatality?  Another participant identified the risks of malicious attackers disrupting or asserting control of systems run by AI and IoT, whether on an industrial scale or on a micro level seeking to take advantage of one individual.

The threat of AI and IoT to jobs was also highlighted.  Many jobs that have kept the workforce occupied for generations could become redundant almost overnight as businesses look to adopt technologies that bring gains in efficiency and productivity and at the same time reduce labour costs.  The labour market is predicted to encounter massive change of a scale not seen since the Industrial Revolution which will have consequent effects on wealth inequality and potentially global stability. While governments and policy makers are likely to take steps to protect jobs, there will be increasing demand for skilled technicians capable of supporting digital capabilities.

The Role of Regulation

The discussion then focused on the two key questions of (a) where should regulation step in and (b) can regulation be effective to manage the risks without diminishing the benefits?

The first observation was that against the backdrop of recent high profile data breaches and the imminent deadline for implementation of the EU’s General Data Protection Regulation, regulation is appropriate and has an important role in managing the risks presented by AI and IoT.  Data privacy legislation has continually evolved since the emergence of the internet, adapting and reacting to the challenges associated with mass collection, use and storage of personal data to ensure privacy, security and transparency.  Privacy laws already apply to AI systems that process personal data, which means new systems need to be designed adhering to these standards where applicable.

One participant commented that it should not be left to the law-makers to ensure risks are adequately legislated against. There is also a role for participants in the market, particularly large corporations, to ensure responsible and fair practices are followed through the adoption of codes of best practice reflecting key ethical principles.  It was noted that Microsoft had established six ethical principles to guide the development and use of artificial intelligence — AI systems should be fair, reliable and safe, private and secure, inclusive, transparent, and accountable.[1]

In discussing the risks of autonomous vehicles, one participant noted that current product liability laws would apply, meaning that claims may exist where loss is caused by a vehicle that is found to be defective or unsafe.  It is likely that these laws will evolve to clarify where responsibility lies, and manufacturers and insurers will look to law-makers to set down standards on how autonomous systems that control driverless vehicles should operate in specific situations rather than make these decisions for themselves.

It was noted that the adoption of standards and regulations for AI and IoT would need to be consistent and coordinated on a global level.  International policy-makers such as the Organisation for Economic Co-operation and Development will need to develop standards that will be accepted universally.  With an increasingly fierce arms-race developing between developed nations to be the economic leader in AI and IoT, this will be challenging.

The final point tackled by the group was the need for employment laws to evolve to recognize the changes in employment practices that are likely to flow from the move to automated systems.  Current employment laws are based around the model of employers employing workers at specific worksites, whereas people are increasingly engaged through remote, part-time or project-based work.  As jobs are displaced through adoption of AI and IoT, new skilled roles will be created to develop, monitor and manage the new systems.  Governments will have an important role in ensuring that the education curriculum adapts to ensure students acquire the necessary skills required to support digital capabilities.

[1] Microsoft. 2018. The Future Computed – Artificial Intelligence and its role in societyhttps://blogs.microsoft.com/uploads/2018/02/The-Future-Computed_2.8.18.pdf

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