Climate Change Insights : Climate Change Law and Policy Lawyers & Attorneys : McKenna Long & Aldridge Law Firm : Climate Change Regulation, Green Strategies, Environmental Policy

Senator Evan Bayh (D-Indiana).  Indiana is among the highest energy consumption per capita States and is responsible for approximately 5 percent of US annual GHG emissions.  Almost all of Indiana’s electricity generation comes from coal.  As one of the nation’s top corn-producing States, Indiana has significant ethanol production potential, and the state has immense wind energy opportunities.  Energy and steel industries are among Mr. Bayh’s top campaign contributors and he is facing a tight re-election campaign in the fall of 2010.  The BP Products refinery in Whiting has the largest processing capacity of any refinery outside of the Gulf Coast region.  Senator Bayh is weighing these considerations deliberatively.  A suite of cost-containment provisions for regulated industries, clean energy incentives for emerging technologies and international competitiveness protections that have direct benefit to Indiana are considerations, as are political prospects in a conservative State.

Senator George Voinovich (R-Ohio).  Energy consumption in Ohio’s industrial sector ranks among the highest in the Nation.  Ohioans are still haunted by a 2003 transmission failure that led to the largest blackout in North American history, affecting over 50 million people.  Coal fuels about nine-tenths of net electricity generation in Ohio.  Senator Voinovich is set to retire in 2010.  On climate change, Voinovich has stated, “There is a lot of work to be done, but it’s still open…I think there is a possibility in getting something done that is meaningful.”  In the past few years, Voinovich has introduced and supports energy bills that focus on incentives for clean energy technology deployment both domestically and internationally including the "Incentives-Based Climate Policy Act," and the “21st Century Energy Technology Deployment Act.”  He is on record saying that there is “too much crap” in the House-passed “American Clean Energy Security Act” (Waxman-Markey), his main concern being the 2020 greenhouse reduction targets under the bill are too ambitious. 

Ohio’s current unemployment rate (11.1%) is higher than the national average (9.7%) as of July 2009.  There is significant angst in the State of losing jobs overseas due to issues such as lower labor and environmental standards.  Accordingly, one can anticipate Voinovich desiring price controls on the cost of carbon and protections against overseas industries that don’t take sectoral or economy-wide carbon cap.

Senator Arlen Specter (D-PA).  Pennsylvania ranks second in the Nation in nuclear power generating capacity, is a major coal production State and sells approximately 50 percent of its coal to other States.  Pennsylvania is also the leading petroleum refining State in the Northeast.  At an August meeting of Netroots Nation, Senator Specter hinted that he “expected” to vote for cloture on a climate bill and stated that he joined the Senate Environment & Public Works Committee after switching to the Democratic Party with a view to shaping the climate legislation and he “expects a strong bill.”  In the past Specter co-sponsored with Sen. Jeff Bingaman, the “Low-Carbon Economy Act,” which had weaker GHG emission targets than Waxman-Markey and established so-called “automatic off ramps” allowing the US to weaken its targets if key developing countries don’t adopt their own caps.

Therein lies the conundrum of getting a robust climate change bill through the Senate and signed into law.  The route to political success relies upon GHG targets that may not match the level of ambition required by science, a further expansion of allowances to regulated entities, and trade protectionist measures as a stick for developing country commitments.  Such provisions are a long way from the Obama Administration goals of science driving policy, 100 percent auction of allowances and emphasizing bilateral clean tech cooperation with China.  Yet, it appears to be the only pathway to move the issue forward in the Senate this political season. 

The American Clean Energy and Security Act of 2009 (ACESA) provides three major sources of funding for reducing emissions from deforestation and degradation. Over the life of the statute the package might lead to the expenditure of between a quarter and a half-trillion dollars to avoided deforestation efforts throughout the developing world, principally the tropics.

The first element, called the Supplemental Pollution Reduction Program, would be the most reliable and certain component of REDD. Its objective is to achieve emissions reductions of at least 720 million tons of CO₂ equivalent by 2020, and cumulative reductions of at least six billion tons by 2025, through the sale of allowances and the investment of the proceeds in international avoided deforestation and degradation. The EPA would allocate a portion of each year's allowances to support the program -- five percent every year from 2012 to 2025, three percent from 2026 to 2030, and two percent in from 2031 to 2050. When sold these allowances would create a fund of $49 billion to $137 billion over the life of the program, assuming the cost of one allowance to be $10-28.

A number of requirements must be met that EPA, with the help of US AID and the State Department, would develop, e. g., qualifying countries will need to enter into a bilateral or multilateral agreement with the US establishing the conditions of participation in the program. It's important to note that not only the eligible country, but also private or public groups or an international fund may receive the allowances. A wide range of activities are covered, but the House pointedly removed support for afforestation and reforestation from the draft bill.

The second source of support for avoided deforestation abroad is built into ACESA's provision for two billion in CO₂e credits for emissions that are offset by acceptable GHG reduction measures. Half of these offsets must come from international activities in developing countries, including avoided deforestation projects. Again, the host nation and the US must be parties to a bilateral or multilateral agreement, and a long list of requirements for credits apply. EPA will be in charge of the program, whereas the Department of Agriculture will administer domestic avoided deforestation offsets. EPA must ensure that the offsets are enforceable and that World Bank-style safeguard policies are in place. It must also encourage profit-sharing with local communities and indigenous peoples. EPA has the discretion to approve offsets for soil carbon losses prevented in forested wetlands or peat lands.

A third, potentially enormous source of international avoided deforestation measures might arise out of the expenditure of proceeds from the auction of allowances that Waxman-Markey directs to be skimmed off the annual allowance budgets and held back and sold if the allowances markets begin to overheat and drive prices out of reach of some covered sources. The "strategic reserve" will hold a total of 2.7 billion allowances. If auctions are necessary, any proceeds can only be used to purchase international offsets from reduced deforestation activities. These offsets would be converted back into emissions allowances and placed in the strategic reserve account (at a 5:4 conversion ratio after 2017, as with other international offsets) to “refill” the reserve to its original size, but once it is replenished any additional allowances from international offsets would be allocated and auctioned as part of the normal allowance auction in a future year. For each of the first five years EPA may auction up to five percent of the emissions allowances established for each year. Beginning in 2017, ten percent of the allowances for a year may be auctioned. For example, since the cap for 2020 is 5,056 allowances, EPA could potentially auction as many as 5.1 million allowances from the strategic reserve. At an auction price of $28 (the floor), EPA would have $142 billion to purchase international offsets from reduced deforestation activities.

The come-from-behind 219-212 vote took place amidst defections by supporters in industry and environmental organizations alike, with even the White House expressing concern about global trade impacts as the vote approached. The passage of ACESA may have been a near thing, but it still would be hard to exaggerate the turning-point the House vote represents. Its commitment for a 20 percent cut in CO2 emissions from 2005 levels by 2020, a 42 percent cut by 2030, and a huge 83 percent cut by mid-century would:

• Transform the US economy and in particular the energy sector;
• Create a multi-billion dollar new market in valuable rights to emit greenhouse gases;
• Provide a terrific boost to the "green economy" that the federal stimulus jump-started;
• Enhance prospects for a bi-lateral agreement with China;
• Virtually assure a new international climate deal in Copenhagen this December; and
• Lay a foundation on which subsequent congresses can build (many scientists say that even these emissions cuts are not nearly enough to get the job done).

The ACESA legislative runs well over a thousand pages, but its basic theory is not hard to understand. The regulatory reality for US industry is in the details of this extremely complex bill.

Regulating Greenhouse Gas Emissions

ACESA prohibits most industrial greenhouse gas releases into the atmosphere, sets an adjustable limit, or "cap," on total releases, and requires major emitters to obtain tradable emissions allowances that have been limited so that the cap will not be exceeded. Initially, the supply of marketable carbon dioxide equivalents allowed under the cap will about equal demand, but as the supply is ratcheted down, over time, supply will not nearly meet demand, and the price of allowances will go up steeply. Candidate Obama wanted the billions of dollars of emissions allowances to be auctioned off to the highest bidders, but as President he went along with the House's decision to allocate most of the valuable "pie" of allowances free by economic sector. This will set the stage for an enormous debate in the Senate over which industrial sectors will receive the many billions of dollars in allowances and economic incentives related to this allocation.

Allowances will be available by government allocation, purchase at auction, or open market trading among holders, with surrender to the government when covered emissions occur. Eventually, up to 85 percent of allowances will be auctioned. Trading will include banking, averaging, and borrowing against future allocations, in addition to market instruments not specifically mentioned in the bill. The Federal Energy Regulatory Commission and the Commodity Futures Trading Commission rather than the Environmental Protection Agency (EPA) would regulate allowances, offset credits, and renewable energy credits. Reflecting recent turmoil on Wall Street, the House voted to bar over-the-counter carbon derivatives trading. In short, the now relatively unregulated markets for trading of newly created carbon and renewable energy credits, futures, and derivatives would come under federal supervision.

The "cap-and-trade" provisions would be implemented and enforced by the EPA under the federal Clean Air Act. The cap-and-trade system would preempt existing state and regional climate change management schemes, but states would be free to enact new, more stringent greenhouse standards. State efficiency codes for buildings would not be preempted despite federal preemption of state appliance standards.

Cap-and-trade would be phased in by regulating greenhouse emissions from electrical plant smokestacks in 2012, industrial sources in 2014, and natural gas and fossil-fuel distribution in 2016. The last phase is important: to handle the tens of millions of small emitters not caught up in this scheme, fuel distributors, e. g., for space heating and gasoline and diesel for vehicles, would have to obtain allowances to cover their customers' emissions, other than the utility and industrial sources already covered by cap-and-trade.

The bill authorizes a limited number of allowances to be created by “offsetting” unregulated greenhouse emissions, including by sequestration that permanently captures carbon in soils and forests. Under the bill, offsets can also be generated by projects that destroy potent greenhouse chlorofluorocarbons, if authorized in advance by the EPA Administrator. Regulations for quantifying and monitoring these offsets have to be written and are bound to become controversial. Again, the devil is in the details of this complex bill.

Emissions Limitations and Efficiency Requirements

Additional specific emissions limitations and efficiency requirements also apply, regardless of allowance allocations. The EPA would use the existing Clean Air Act to develop technology-based standards limiting emissions from some sources not covered by cap-and-trade. These highly specific requirements reflect a bargaining process that will continue in the Senate. Also, the bill would create a new national renewable portfolio standard (RPS) that would require utilities by 2012 to generate six percent of their electricity from energy efficiency measures or from renewable energy sources like wind and solar. The RPS would increase by roughly three percent each year until 2021, when it would top out at 20 percent. The RPS standard would not preempt more stringent state RPS standards, and states would be permitted to require utilities to retire federal renewable energy credits received in excess of the federal standard. The bill also calls for state planning programs to reduce emissions from transportation and for land use and other state and federal plans to foster adaptation to climate changes that already appear almost certain to occur.

Economic Incentives

Economic incentives (subsidies, grants, waivers, etc.) are provided to relieve hardship and promote a more rapid transition to the "low carbon" economy the bill contemplates. These provisions likewise provide important political bargaining opportunities, alongside the initial allocation of allowances, and together these will be a major focus in the Senate. The welter of provisions includes tax and funding incentives for renewable energy, energy efficiency, smart grid improvements, transportation programs, fuel-switching from coal to natural gas. and programs to capture and sequester greenhouse gas emissions. For example, ACESA directs many billions of dollars to the evolving technology of coal-fired electrical generation with carbon capture and store (CCS).

Representatives from states with large agriculture or forestry markets secured provisions to grandfather biodiesel facilities from the low carbon requirements of the 2007 energy law and broaden the definition of renewable biomass to gain additional credit under the RPS and the existing renewable fuels standard. The bill addresses the harvest of biomass from dead or damaged trees or "late successional" stands and clarifies that the agricultural and forestry sectors are exempt from the bill's emissions cap. Eleventh-hour agreements to address the concerns of farm-state lawmakers secured an additional billion dollars for agriculture producers who engage (or engaged prior to 2001) in conservation and stewardship practices that reduce or sequester greenhouse gas emissions but would not otherwise qualify under the offsets section of the bill. Additional allowances for rural electric cooperatives, and language blocking EPA from going forward with methods for calculating international indirect emissions from land-use changes from biofuels production as part of a final renewable fuel standard (RFS) expected this summer, were also obtained. Finally, the bill also would launch a major global effort to stop deforestation that would add yet more CO2 savings in 2020 equal to 10 percent of current US emissions.

Conclusion

Some have called the passing of ACES "a stunning achievement, a rare alignment of the stars," and "the single most important vote a member will ever cast," yet others, including some environmental organizations, have called it a massive give-away of billions of dollars of newly valuable emissions rights. However it may have been characterized, ACESA is a milestone in the lengthy US process of coming to terms with climate change. Whether it will be as epochal an achievement as some commentators have said will play out in the Senate, to which all eyes now turn. Regarding economic impact, the Congressional Budget Office found that the cost of ACESA to the average American household in 2020 would be, in the words of a prominent former Energy Department official, about the cost of "a postage stamp a day" so that ACESA would basically “pay for itself.” A prominent economist added that his figures show that more than 80 percent of the value of the billions in allowances will go back to consumers and to public purposes, leaving about 20 percent of the value of allowances for industry. These assertions will be tested and the debate on the issue will be joined by many others as the focus now shifts to the Senate.