With almost four months between now and the first carbon allowance auction, questions remain about the feasibility and economic impact of California’s Cap-and-Trade program. While the legal question has been resolved, some commentators have been critical about the consequences of California’s environmental policy path.

The California First District Court of Appeals case AIR v. CARB sheds light on recent legal attempts to derail California’s Cap-and-Trade regulations passed under California’s Global Warming Solutions Act, AB 32. As part of the AB 32 Scoping plan, Cap-and-Trade sets government mandated limits, “caps”, on major sources of greenhouse gas emissions from refineries, power plants, industrial facilities, and transportation fuels. The goal of the “cap” is to reduce greenhouse gas emissions to 1990 levels by the year 2020 by incrementally lowering the total amount of green house gases allowed to be emitted. The “Trade” aspect of the program refers to swapping allowances between participants that emit greenhouse gases. If a particular entity’s operations are over its allowances, that facility may buy or trade for extra allowances to increase its limit.

Legal challenges are not the only way opponents resist California’s institution of Cap-and-Trade program. Western States Petroleum Association (WSPA), in combination with Boston Consulting Group (BCG), recently published a study challenging the science and economic repercussions that this policy creates.  In a letter to California Governor Jerry Brown, Catherine Reheis-Boyd, President of the WSPA stated, “[t]he current fuels policies will have significant unintended consequences on California’s refiners, and consequently their employees, consumers and the state.” Brad Van Tassel, Senior Partner and lead researcher for the study, also commented, “California’s [Cap and Trade] policies pose some really impossible challenges for refiners in California that have the potential to disrupt fuel markets and fuel supplies in very serious ways.”

An example of these fuel market disruptions would be the institution of Carbon Intensity Reductions within the AB 32 Low Carbon Fuel Standard (LCFS) that requires facilities to use lower carbon intensity fuels. This mandate creates a 1% reduction in Carbon Intensity by 2013; a 5% reduction by 2017; and a 10% reduction by 2020.

The problem for fuel markets is that only cellulosic ethanol and Brazilian cane ethanol have low enough Carbon Intensities to materially reduce the Carbon Intensity of existing fuels. But cellulosic ethanol cannot be produced in sufficient commercial quantities with today’s technology, and Brazil does not produce enough cane ethanol to meet California’s demand at the specified CI, even if all of it were sent to California. This scenario would require 150% of the current supply of ethanol fuel from Brazil and could possibly stress fuel supply if there is high demand. Others have brought up concerns about the potential for market manipulation, non-compliance, and fraud; as has happened to California before with the electricity markets in 2000-2001.

Despite these concerns, California policy makers have not changed their minds with respect to Cap-and-Trade’s pending institution. Whether it is a belief in California’s capacity to adapt to certain market stressors or the inability to reverse the charted course, none can say for certain. What is certain is that California is heading into uncharted territory, and as in all transitional periods of policy, certain set backs are to be expected. The question then is how many of these set backs are Californians willing to endure in order to preserve California’s environmental image and the benefits of Cap-and-Trade.

Is Facebook a force that will define a generation? Or is it a transient manifestation of the bigger social media revolution – springing from the demand to connect using the latest technologies?  While Facebook’s cultural impact raises such philosophical questions, its business model and recent IPO have raised legal questions that are likely going to take just as long to answer.

Throughout Facebook’s history, it has sought to balance its social and corporate missions. In a letter to prospective investors during the IPO process, Mark Zuckerberg remarked that Facebook was built “to accomplish a social mission” of creating a more connected world. Arguably, Facebook has fared well in its social mission. Through the power of networking, Facebook has helped connect diverse populations, crossing geographical, ethnic, and cultural boundaries. In some cases, Facebook even has helped facilitate revolutions. Not surprisingly, Facebook also is in a position to foretell where Internet usage is trending. Through placing certain advertisers in users’ newsfeeds, Facebook has shown the ability to increase traffic to advertisers three-fold.

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The United States is restarting Bilateral Investment Treaty (BIT) negotiations with BRIC countries (Brazil, Russia, India and China) after a recent revision to the United States’ model BIT.  On April 20, 2012, the Office of the United States Trade Representative (USTR) released the new 2012 model BIT after a lengthy three-year review and revision process.

BIT negotiations with the United States, until recently, had been on hold since 2009.  Upon taking office in 2009, President Obama immediately called for a review of the model text to ensure its consistency with the “public interest” and the Administration’s overall economic agenda, as well as to make certain that “U.S. companies benefit from a level playing field in foreign markets.”

BITs are bilateral agreements between two States aimed to protect private investors (either companies or individuals) of one State operating in the territory of the other host State.  BITs entered into by the United States, unlike Free Trade Agreements (FTAs), have tended to address a more limited number of issues by focusing on treatment of foreign investment once a host State has availed itself to such investment rather than regulating access of foreign investment into the host State.

The United States often takes a hard stance in negotiating BITs, insisting that other countries accept the provisions of its model text.  The model text was last revised in 2004 after President Bush took office.  The United States is currently a party to 46 BITs, including six that have been signed, but not ratified. Worldwide, 178 economies have entered into more than 2500 BITs.

United States BITs are important tools for protecting overseas investment. BITs protect United States companies and individuals investing abroad or facing adverse actions from a host State while invested abroad.  The United States model text aims to afford investors national treatment or most-favored nation treatment, compensation in the event of expropriation, and protections against currency inconvertibility of funds into and out of a host State.  The model text also provides restrictions against imposing performance requirements onto investments, as well as the rights to select top management regardless of nationality and to submit an investment dispute to international arbitration, rather than being subjected to the host State’s domestic courts.

In updating the model text, USTR and the State Department solicited input on provisions relating to dispute settlement, state-owned enterprises, and financial services. Businesses, non-governmental organizations, Congress and the public provided comments. Among other stakeholders, the Advisory Committee on International Economic Policy (ACIEP), which includes Berkeley Law’s Professor David Caron, submitted a report regarding its view of the model text.  As Professor Caron described “the deep challenge for the State Department in considering the many viewpoints expressed was to work at questions of expertise while simultaneously also weighing fundamentally different philosophical and political values.”

The 2012 model BIT made some changes as a result of perceived shortcomings in the prior text.  One such change is that obligations under BITs also extend to entities that are delegated (through formal and informal means) governmental authority, which clarifies concerns that state-owned enterprises were receiving preferential treatment relative to foreign investors. (Article 2.2.a footnote 8).  Another such change relates to prohibitions against performance measures that require an investor to show a preference to 1) the host State’s technology and/or 2) any particular technology.  (Article 8.1.h). A further revision relates to transparency, requiring publication of regulatory actions and transparency into State regulatory matters.  The goal is to appraise investors of upcoming regulatory changes in host States. (Articles 11.3 and 11.4).   Lastly, the 2012 model BIT includes language that places obligations onto host States to recognize, enforce and not derogate from domestic environmental and labor laws (Articles 12.1, 13.1, 12.2, 13.2).  A full analysis of the revisions can be found here.

Ultimately, the Obama Administration declined to adopt many of the modifications proposed during the review.  The 2012 model BIT retains the core substantive investment protections, which include non-discriminatory treatment (Articles 3 and 4), treatment in accordance with customary international law (Article 5) and compensation for expropriation (Article 6).  The text also retained the investor-State dispute settlement clauses (Article 23-36), disappointing some critics of investment treaty arbitration.

Reactions to the new 2012 model BIT are sharply divided between those who want to protect domestic public interests and sovereign rule of law and those who want to protect U.S. investments overseas and eliminate foreign barriers.  The Administration appears to have spent a great deal of effort analyzing the provisions of the model text, but ultimately chose to preserve a similar balance as in the 2004 model.  Admittedly, this is a difficult balance.

While the revisions to the model text will not modify existing treaties, the new provisions will form the basis of future negotiations.  The completion of the new model BIT text seems to have renewed negotiations with both China and India.  Russia has also expressed interest in engaging in negotiations, and the US has sought to engage Brazil in beginning talks.  Other opportunities for negotiation also are emerging with various African countries.

[Note: Professor Caron’s quote added after initial publication]