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Climate Change Takes Center Stage in the Senate

June 4, 2008

The Senate opened debate this week on the Lieberman-Warner Climate Security Act of 2008 (S. 3036/S. 2191) and is scheduled to consider the 492-page bill – and dozens of proposed amendments -- in the coming weeks. The Climate Security Act, co-authored by Senators Joseph Lieberman (I-CT) and John Warner (R-VA) and co-sponsored by California Democrat Barbara Boxer, aims to reduce the nation’s greenhouse gas (GHG) emissions by 70% below 2005 levels by 2050. Debate begins during a busy week in Washington for climate change policy, including the release of a White House-commissioned scientific report and a House bill sponsored by Rep. Edward Markey’s (D-MA) calling for the regulation of GHGs. The White House report acknowledges human contributions to climate change and analyzes its impacts on agriculture, human health, and security.[1] Rep. Markey’s Investing in Climate Action and Protection (iCAP) Act sets a GHG emission reduction target of 85% below 2005 levels by 2050, and is expected to be introduced to the House later in June.[2] Presumptive Presidential candidates Barack Obama (D-IL) and John McCain (R-AZ) have said they both support federal-level GHG emissions regulation to address global climate change. Sen. McCain co-authored the last climate change bill to go to the Senate floor, in 2003.

The Climate Security Act would give the U.S. Environmental Protection Agency (EPA) the authority to regulate GHG emissions in the electric power production, energy, industrial and transportation sectors. The Act establishes oversight mechanisms to support a GHG emissions trading market, transition assistance for affected industries and individuals, and financing for low-carbon and renewable energy research and development. It also offers guidelines for crediting emission offsets and sequestration projects. The Act proposes restrictions on international trade with countries that have not established similar mandatory GHG emission reduction programs, a warning to India and China. The Act also discusses how credit is to be given for “early action” by carbon emitters to reduce GHG emissions, and there are substantial incentives offered to states that agree to abandon their own climate change laws in favor of the proposed federal system.

The annual emission reduction requirements proposed in the Act apply to any entity in the United States that produces more than 10,000 metric tons of carbon dioxide equivalents per year, as well as any entity that imports more than 10,000 metric tons of carbon dioxide equivalents per year.[3] This definition is clarified to specifically include entities that use more than 5,000 metric tons of coal each year; manufacture liquid or gaseous fossil fuels or hold title to such fuels at the time they are imported into the United States; produce natural gas in Alaska; process natural gas in any state other than Alaska; or manufacture hydrofluorocarbons. Annual emission reduction requirements are scheduled to begin in 2012 with a reduction to 4% below 2005 levels. Annual reductions in the carbon “cap” are to begin in 2013 and continue until 2050, the final abatement year.[4]

The Act establishes a Federal Greenhouse-Gas Registry for emissions and offset projects modeled after the Climate Registry and other existing registries.[5] Timelines are laid out for emissions reporting and proof of compliance based on annual emissions and purchase or sale of supplemental allowances.[6] Noncompliance is to be punishable by monetary penalties. This structure is similar to that of the cap-and-trade Acid Rain Program, which regulates sulfur dioxide emissions.

The Climate Security Act provides incentives for some “early” emission offset projects and abatement, but does not guarantee that all projects in existing regulatory and voluntary carbon markets will be credited in a future federal system. Project-based GHG emission offsets are permitted for use in compliance, but the total number of offsets to be distributed is limited to 15% of the total quantity of emissions needed.[7] International offsets will be allowed into the system if domestically produced offsets to not reach the 15% ceiling.The Act lists broad eligibility requirements and monitoring, reporting and verification protocols for offset projects, and gives the EPA Administrator and the Secretary of Agriculture control of future offset program development.[8] Regarding GHG emission offset projects currently in operation, the Act states that offset allowances issued under the Northeast’s Regional Greenhouse Gas Initiative (RGGI) will be credited in the federal system.[9] Banked offsets listed on other public or private registries, including the Climate Registry and the Chicago Climate Exchange Registry, may be credited in the federal registry with the approval of the EPA Administrator.[10] The Act ensures that entities holding RGGI allowances or allowances issued by the State of California under the California Global Warming Solutions Act of 2006 will be allocated early action credits, but does not specifically mention any existing voluntary emission registries.[11] Power plants that repowered from coal prior to 2005 as a result of a consent decree are also guaranteed federal early action allowances.[12] Other applicants for early action credit must have initiated abatement between January 1994 and the enactment of the Climate Security Act.[13]

Distribution of emission allowances will occur through a mix of periodic allowance auctions and free allocation to electric power producers, manufacturers, electricity and gas distribution companies and other entities. The top three recipients of free allocations in 2012, as currently designated in the Act, are fossil fuel-fired power plants (18% of total allowances), electricity and gas consumers, via distribution companies (12.75% of total allowances) and carbon intensive manufacturers (11% of total allowances).[14] Allocations are to be based on recent historical facility-level GHG emissions.[15] Distribution of allocated allowances shifts each year over the course of the program. From 2032 on, allocations to manufacturing and fossil fuel-fired power plants drop to zero and financial assistance for consumers and use of auction revenue for federal deficit reduction increases significantly. Research and development in areas such as renewable power generation, global warming adaptation and energy efficiency in buildings, appliances, mass transit and manufacturing are to be financed through a combination of revenue-raising federal allowance auctions and allocation of free allowances to the EPA Administrator and sector-specific oversight boards for subsequent distribution to consumers, top performers and new technologies. Auction revenue will also be used to fund EPA’s program administration costs.

Allowance allocations and use of auction revenue are likely to be the focus of much of the Senate debate. Some senators have already announced that they plan to propose amendments on these fronts. Sen. Bob Corker (R-TN) announced May 28 that he would introduce amendments to increase the proportion of auctioned allowances; distribute auction proceeds directly to households; and eliminate use of international offsets for compliance.[16] Sen. Judd Gregg (R-NH) said May 29 that auction revenues should be used to offset tax reductions.[17] The United States Climate Action Partnership (USCAP), a coalition of electric power companies, manufacturers and environmental groups including Duke Energy, Ford Motor Company and General Electric, has not endorsed the Climate Security Act but calls it “a welcome step” in establishing federal-level climate change regulation.[18] Manufacturers and labor unions are split. The AFL-CIO as a whole has said it will not take a position, but the International Brotherhood of Electrical Workers and the International Union of Bricklayers and Allied Craftworkers are in favor of the Act. The United Mineworkers of America and the United Auto Workers are expected to publicly oppose the Act in the near future.

Language pertaining to state-level regulation of GHGs comes at a critical time for states that are currently drafting and in some cases finalizing cap-and-trade regulation to fill the void left by inaction at the federal level. Currently, 25 states have adopted mandatory GHG emissions caps, most of them in the context of regional cap-and-trade programs such as RGGI and the Western Climate Initiative. Most of the pposition to these programs has not been targeted at the general notion of capping GHG emissions, but rather the possibility that a patchwork of state-run programs will unnecessarily raise compliance costs and skew interstate competition in manufacturing and electricity production, in particular. USCAP was founded in 2007 to support creation of a federal GHG cap-and-trade program that would subsume state-level efforts.

The Act addresses the issue of state-level GHG regulation by offering additional allowance allocations to states that, “have led the nation” in GHG emissions abatement, a designation based on historical investments and achievements in reducing GHG emissions and increasing energy efficiency.[19] These allowances would be available for leading states that have never established cap-and-trade programs for GHGs and states with such programs that agree to transition to the federal cap-and-trade program and abandon plans for state or regional trading. The allocations made in this area are 4% of total emissions in 2012, but become a significant portion of total allocations in the later years of the program. The Act is clear on the point that states retain the right to adopt state-level climate change regulation, so long as it is as or more stringent than the requirements of a future federal system.[20] Allowances and auction revenue not tied to state-level climate change regulation are also allocated to all states for transition assistance, adaptation to global warming and natural resource management in the current draft of the Act. The regional cap-and-trade groups – RGGI, the Western Climate Initiative and the Midwestern Governors Association – have not released formal comment.

For more information on climate change legislation and regulation please contact Brad Marten or any member of Marten Law Group’s Climate Change and Sustainability practice group.

[1] U.S. Climate Change Science Program. Scientific Assessment of the Effects of Global Change on the United States. May 2008. Available online: www.climatescience.gov/Library/scientific-assessment/.

[2] Press Release. “Markey Announces Revolutionary Global Warming Bill.” May 28, 2008. Available online: markey.house.gov.

[3] Lieberman-Warner Climate Security Act of 2008, S. 3036, 110th Cong., 2nd Sess. (2008). Section 4(14)).

[4] Ibid. Section 201.

[5] Ibid. Title I, Subtitle A.

[6] Ibid. Section 202.

[7] Ibid. Section 312.

[8] Ibid. Section 312(f).

[9] Ibid. Section 312(b).

[10] Ibid. Section 318(b).

[11] Ibid. Section 704.

[12] Ibid. Section 705.

[13] Ibid. Section 701.

[14] Ibid. Section 551, 561, 611(a).

[15] Ibid. Section 552, 562, 611(b).

[16] Press release. “Corker Announces Amendments to Climate Security Legislation.” May 28, 2008. Available online: corker.senate.gov.

[17] Press release. “Gregg Comments on Climate Change Legislation to be Considered by the Senate Early Next Week.” May 29, 2008. Available online: gregg.senate.gov.

[18] United States Climate Action Partnership. Letter to Senators. May 30, 2008. Available online: www.us-cap.org.

[19] Lieberman-Warner Climate Security Act of 2008, S. 3036, 110th Cong., 2nd Sess. (2008). Section 625.

[20] Ibid. Section 1741.

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