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Senators Kerry and Lieberman Unveil Comprehensive Energy and Climate Bill

Beveridge & Diamond, P.C., May 17, 2010

I.   Summary

On May 12, 2010, Senators John Kerry (D-MA) and Joseph Lieberman (I-CT) unveiled a “discussion draft” of their long-awaited climate change and energy bill, the American Power Act.  Key features of the bill include economy-wide targets for greenhouse gas (“GHG”) emission reductions, a cap-and-trade program extending to electric utilities, manufacturing facilities, and natural gas distributors, and a fee imposed on fuel refiners in the form of a requirement to purchase and retire allowances.  The bill also would provide numerous incentives and concessions, including loan guarantees for nuclear plant operators, expansion of offshore drilling, consumer rebates, and assistance for trade-exposed industries. 

The bill emerges after nearly eight months of negotiations and numerous setbacks, most notably, the abrupt departure of sponsor Lindsey Graham (R-SC), who was expected to secure critical bipartisan support for the bill.  Despite the optimism of Senators Kerry and Lieberman, prospects for the bill’s passage appear slim given the difficult political climate and renewed concerns regarding offshore drilling, a key concession in the bill. 

The discussion draft of the 987-page bill is available here

II.   GHG Emissions Limitations for Targeted Sectors

The bill would set nationwide GHG reduction targets to be achieved primarily through the bill’s central feature, a cap-and-trade program for the electricity and manufacturing sectors.  In addition, petroleum refiners would be required to purchase allowances (to cover the emissions associated with the use of  fuels they produce), but would not be permitted to trade these allowances.  Specific provisions relating to the bill’s GHG emissions limitations are summarized below.

  • GHGs Covered:  The bill would apply to emissions of the “Kyoto six” GHGs –– carbon dioxide (CO2), methane (CH4), nitrous oxide (N2O), hydrofluorocarbons (HFCs), perfluorocarbons (PFCs), and sulfur hexafluoride (SF6) –– plus nitrogen trifluoride (NF3).  The U.S. Environmental Protection Agency (“EPA”) would have the authority to designate additional GHGs through rulemaking.
  • Overall Targets:  The bill would require a 4.75 percent reduction in GHG emissions below 2005 levels by 2013; a 17 percent reduction by 2020; a 42 percent reduction by 2030; and an 83 percent reduction by 2050.  
  • Which Sectors Are Covered?  The bill would require “covered entities” to match their GHG emissions with allowances, which are issued on an economy-wide basis annually, and which decrease over time.  Electric utilities would be covered entities beginning in 2013, while natural gas distributors and manufacturing facilities –– including industrial gas producers and importers, nitrogen trifluoride sources, and various other industries (e.g., lime manufacturing, cement production) –– would be phased-in as covered entities beginning in 2016.  Petroleum refiners and importers would be required to purchase and immediately retire allowances on a quarterly basis beginning in 2013 to account for emissions associated with the use of covered fuels.   
  • Threshold for Coverage:  The bill sets an emissions threshold of  25,000 metric tons of carbon dioxide equivalent per year for most categories of manufacturing facilities (although several categories of manufacturers are included as covered entities without reference to an emissions threshold, e.g., titanium dioxide and adipic acid production).  Natural gas distributors would be covered entities if they deliver 460 million cubic feet or more of natural gas per year.  Electric utilities and refiners that meet the definitions in the bill are covered irrespective of total emissions.  Approximately 7,500 entities are expected to be regulated under the bill.
  • Allowance Allocation:  Covered entities (excluding refiners) subject to the cap-and-trade program initially would receive a certain percentage of allowances distributed free of charge, with the percentage of auctioned allowances gradually increasing to 100 percent by 2030.  Allocations to electric utilities would be based 75 percent on historic GHG emissions and 25 percent on retail sales.  (This differs from the House-approved Waxman-Markey bill, which proposed an allocation based 50 percent on historic emissions and 50 percent on retail sales.)  Refiners would be required to purchase allowances directly from EPA, and EPA would guarantee the availability of these allowances at the most recent auction price.
  • Offsets:  The bill would authorize up to two billion tons of offset credits per year for use toward compliance with emissions reduction obligations, 500,000 of which can be international offsets.  Domestic offset credits could be used on a one-to-one basis (i.e., domestic offsets and allowances would “count” equally toward compliance obligations), while international offset credits would be discounted at a rate of 25 percent.  Emitters may use offsets to meet a portion of their allowance requirements; that portion is equal the emitter’s percentage share of the total GHG emissions by covered entities times two billion.  (In other words, they get a share of the pool of allowed offsets equal to their share of the covered entities total GHG emissions.  As those numbers are not set yet, it is difficult to assess how restrictive this quantitative limit will be in practice.)

    EPA and the Department of Agriculture (“USDA”) would be required to establish a domestic offsets program and to consider a specific list of eligible project categories, including: fugitive methane emissions (from coal mines, landfills, and oil and gas distribution facilities); agricultural, grassland, and rangeland sequestration and management; afforestation and reforestation; land use and forestry; and carbon capture and sequestration.  A “positive list” of presumptively approved offset project types is included; EPA and USDA can add to it over time.  The eligibility date for offset projects is set at January 1, 2009 (Waxman-Markey set it at January 1, 2001), though the bill does provide a means for the approval of offsets generated by projects dating back to 2001.  Section 740 provides that “regulatory or voluntary greenhouse gas emission offset program may apply to [EPA and the USDA] for approval as a qualified early offset program.”  The USDA would administer agriculture and forestry offsets and EPA would administer all others.  The bill does not list eligible project categories for international offsets, but would establish a mechanism for generating international offset credits from reduced deforestation (“REDD”) activities.
  • Linkage:  The bill would permit EPA, in conjunction with the Department of State, to authorize the use of international allowances or credits toward compliance with the bill’s GHG emission limitations.  In addition, EPA would be required within one year of the bill’s enactment to develop regulations allowing individuals or entities to exchange state allowances for federal emission allowances. 

III.   Cost Containment Mechanisms

In addition to the offsets provisions, the bill includes a significant cost containment mechanism that Waxman-Markey did not:  a “hard” “price collar” to keep the price of carbon between $12 and $25 per ton.  The price floor is set at $12 in 2013 plus 3% + CPI in subsequent years; the price ceiling is set at $25 in 2013 plus 5% + CPI in subsequent years.  Note that the ceiling thus will increase at a faster rate than the floor.  In addition to containing the cost of compliance, the price collar provides a great deal of cost certainty by limiting market fluctuation, Some commentators have warned that fixing such parameters at the outset can cause market distortions later, as conditions change.  

IV.   Market Oversight

Covered entities (except for refiners that have purchased allowances directly from EPA) would be able to trade allowances on a national GHG emissions market.  However, participation in the primary market would be limited to entities that are subject to the bill’s compliance obligations or that are registered with the Commodity Futures Trading Commission (“CFTC”) as “regulated greenhouse gas market participants.”  The CFTC, in conjunction with EPA, appears to have broad authority under the bill to permit or deny access to the primary market based on a determination as to whether “additional participants are necessary for a liquid and well-functioning market . . . .”  The bill would require derivatives sold on the secondary market to be cleared by a CFTC-approved “greenhouse gas clearing organization.”  The bill also includes numerous provisions designed to prohibit fraud and manipulation with respect to GHG instruments, and the CFTC is authorized to limit excessive speculation. 

V.   Preemption of State and EPA Authority to Regulate GHGs

The bill would permanently preempt state authority to regulate GHGs through sub-national cap-and-trade programs.  To mitigate the impact, the bill provides for some limited recognition of offsets generated under these programs.  It also allows and in some cases requires EPA to incorporate registries and work done by state and voluntary organizations.  For example, Section 733(b)(1) allows the EPA to “establish a registry (or expand an established emission allowance registry) for use in issuing and recording credits approved and issued.”  Section 735(c) states that EPA, when establishing offset methodologies, “shall give due consideration to methodologies for offset projects existing as of the date of enactment of the Act.”  Thus, EPA is given the flexibility to build on what NGOs, state governments such as California, and regional initiatives such as the Regional Greenhouse Gas Initiative (“RGGI”) and the Western Climate Initiative (“WCI”) have done. 

While states’ cap-and-trade programs would be preempted, the bill would not prevent the states from continuing to develop GHG control programs or establish state-wide GHG emissions limits or energy efficiency measures.

The bill also would partially preempt EPA authority to regulate GHGs under certain programs.  For example, it would prohibit EPA from regulating GHGs pursuant to the National Ambient Air Quality Standards, New Source Review, and Title V permitting authorities under the Clean Air Act.  EPA would, however, retain authority under the bill to regulate existing power plants under Section 111(d) of the Clean Air Act.  Moreover, EPA could continue to develop New Source Performance Standards for sources that are not covered entities (except those eligible to receive offset credits) and could potentially regulate GHGs under other federal statutes (e.g., the Clean Water Act).

VI.   Other Key Provisions

  • Offshore Drilling:  The bill contains provisions to expand domestic oil drilling, including revenue sharing for states that allow increased production off their shores.  However, the bill would also allow a state to prohibit drilling within 75 miles of the state’s shores. 
  • International Competitiveness:  The bill would establish a border adjustment mechanism to take effect in 2025, which would essentially require importers to buy carbon allowances for commodities such as steel, aluminum, or cement from countries that do not have GHG reduction programs.  In addition, the bill would establish an international reserve for the provision of allowance rebates to eligible sectors that are trade sensitive (determined by EPA through rulemaking).
  • Performance Standards for New Coal-Fired Power Plants:  Coal-fired power plants permitted after January 2020 would be required to reduce CO2 emissions by at least 65 percent.  New plants permitted between 2009 and 2015 would be required to reduce CO2 emissions by at least 50 percent within four years from the date on which certain carbon capture and storage commercialization targets are met.  
  • Consumer Rebates:  Two-thirds of revenues generated by the bill would be rebated to consumers through energy bill discounts and direct rebates.  Additional rebates would be available for families that are disproportionately affected by increased energy costs.  

VII.   Next Steps

Despite the bill’s initial introduction as a “discussion draft,” pressure is mounting from environmental groups for formal introduction into the Senate.  The bill is currently undergoing economic review at EPA, and results of this review are expected in late June.  Meanwhile, Senate Majority Leader Harry Reid (D-NV) is scheduled to confer with committee chairs in May to evaluate support for the bill and determine the timing of floor debate.  If the bill passes the Senate, it would need to be reconciled with the Waxman-Markey bill that was approved by the House last June.

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For a printable PDF of this article, please click here.

For more information, please contact Russ LaMotte at rlamotte@bdlaw.com, (202)-789-6080, Nicholas van Aelstyn at nvanaelstyn@bdlaw.com, (415) 262-4008, or Lauren Hopkins at lhopkins@bdlaw.com, (202) 789-6081. 

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