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Three Key Issues Emerge in Congressional Climate Debate

October 16, 2008

Congressman John Dingell, the powerful Chairman of the House Energy and Commerce Committee, anticipating Congressional debate next year on comprehensive greenhouse gas control legislation, released a draft bill on October 7, 2008 that would first cap and then reduce emissions from most sources of greenhouse gases by 80 percent by the year 2050.[1] The Dingell bill, described as a “discussion draft” and co-sponsored by Subcommittee Chairman Rick Boucher, is the second comprehensive climate change bill to come out of the House this year. A bill was introduced in June by Congressman Ed Markey,[2] Chairman of a select committee named by House Speaker Nancy Pelosi to specifically address global warming issues.

The Dingell-Boucher and Markey bills both call for an economy-wide greenhouse gas cap-and-trade system, but differ in three respects – 1) the pace of emission reductions; 2) the methods used to distributed emission allowances; and 3) on whether to preempt state and local greenhouse gas controls.

1. Pace of Emission Reductions

While the Dingell-Boucher bill’s ultimate goal of reducing emissions 80 percent from 2005 levels by 2050 is similar to the Markey bill’s target of 85 percent reductions over the same period, the Markey bill seeks earlier implementation, with a 20 percent reduction by 2020, compared to a 6 percent reduction over that same period under the Dingell-Boucher proposal. However, Dingell-Boucher would accelerate reductions after 2020, setting a 44 percent reduction target in 2030. So on this issue, the main difference is the initial pace of reductions during the first ten years that controls are in place.

The quicker initial pace of reductions in the Markey bill is consistent with objectives adopted by the State of Washington and other states.[3] Arguments in favor of significant reductions by 2020 include doubt that delayed reductions will actually take place, and increasing concern about the pace at which world CO2 emissions are increasing. But the Dingell-Boucher bill’s slower initial pace is backed up by a white paper prepared by staff of the Energy and Commerce Committee,[4] which claims that a slower start followed by a steeper reduction curve will achieve desired emission reductions at a lower overall cost and with the least economic disruption. The Committee white paper suggests that the most cost-effective reductions will come through a combination of increasing energy efficiency and introduction of new technologies, including developing carbon capture and geologic sequestration to the point that it becomes widely available. The white paper also suggests that this approach can achieve significant reductions through measures that actually produce net savings, such as through reduced energy use.

2. Allocation of Allowances

The Dingell-Boucher “discussion draft” does not pick a single allocation method, but instead offers four alternatives, ranging from distributing allowances to existing sources at no charge, to a complete auction with substantial rebates to consumers. The two middle options would reduce the free allocations to existing sources and use auction proceeds for various purposes. In addition to consumer rebates, the Dingell-Boucher alternatives also would fund, to varying degrees, clean technology development, incentives for early emission reductions, a climate change adaptation program, and deficit reduction. Dingell-Boucher also proposes that some allowances be put aside in a “strategic reserve,” which would be auctioned off if the price of allowances on the open market gets too high.

In contrast, the Markey bill would auction off all emission allowances, with the exception of the early years of the program, when six percent would be set aside to help transition greenhouse gas-intensive industries in globally competitive sectors such as steel, aluminum, and pulp and paper. It would allocate 55 percent of auction proceeds – estimated at $110 billion a year – to low and middle income consumers to offset the resulting increased cost of energy and goods. The remainder would be used to promote energy efficiency, green job training, technology development and deployment, reduction of deforestation, developing country assistance, and climate change adaptation or mitigation.

Both bills would use proceeds from emission allowance auctions to fund many of the same programs, with the Markey bill more heavily weighted toward distribution to consumers, and three of the Dingell-Boucher alternatives providing more assistance to affected industries. The Dingell-Boucher proposals are more detailed, and provide more nuanced choices on how to use auction proceeds to mitigate the impacts on the economy of placing a price on carbon.

3. Preemption

The last major area of disagreement between the two proposals is whether a federal greenhouse gas program should preempt the state and regional programs already in place or in development. The Dingell bill would preempt state and regional programs like the Northeast’s Regional Greenhouse Gas Initiative (“RGGI”), which had its first auction in October, the California program now being developed in response to the landmark state greenhouse gas control law, AB 32, and the Western Climate Initiative, which has developed guidelines for a Western States cap-and-trade program. The Markey bill would preserve state authority where it is more stringent than federal standards.

The call for preemption will face stiff opposition. The Clean Air Act currently allows states to adopt emission standards for stationary sources that are more stringent than federal requirements, and allows California to set more stringent standards for motor vehicles – which have also been adopted by a number of other states. Arguments in favor of extending this approach to greenhouse gases include a belief that more stringent state programs can achieve additional or more rapid emission reductions, that the states will spur technology development, and that the states provide a testing ground for new programs. Both the Speaker of the House, who represents a district in San Francisco, and the Chair of the Senate Environment Committee, California Senator Barbara Boxer, support California’s ability to adopt more stringent state standards, and can be expected to argue vigorously for that position.

Dingell and Boucher respond to the arguments against preemption with another white paper prepared by Energy and Commerce Committee Staff, concerning appropriate roles in achieving greenhouse gas control for the different levels of government.[5] This white paper asserts that because climate change is a global rather than local problem, the arguments against preemption that were appropriate for criteria pollutants like nitrogen oxides and carbon monoxide do not fit for greenhouse gases. It also questions whether allowing states to adopt a more rapid emission reduction path will have the desired effect, or simply increase emission reduction costs. But its strongest arguments are aimed at the efforts by California and other states to adopt greenhouse gas emission standards for motor vehicles. It questions whether more stringent state standards can be achieved without fundamentally changing vehicle characteristics, since there is no bolt-on technology like a catalytic converter currently available to reduce greenhouse gas emissions. It also argues that individual state standards for products that are sold across state lines place a burden on interstate commerce, and notes the relatively small share of auto manufacturing jobs located in California and the other states that have followed its lead in adopted vehicle greenhouse gas standards. Ultimately, the Commerce Committee white paper argues that states should only be given leeway in areas such as energy efficiency standards for local building codes.

There is unlikely to be a clean resolution of the preemption issue. The administrative complexity of a national cap-and-trade program makes it difficult to envision one or more parallel state or regional programs with different emission reduction schedules, separate allocation auctions, and different emission offset policies. But the same objections may not apply to state and regional emission performance standards, like the California motor vehicle standards – much to the chagrin of Congressman Dingell and his Michigan constituents.

Additional Details Regarding Markey And Dingell-Boucher Bills

Covered Sources

The Dingell-Boucher bill claims to cover 88 percent of U.S. greenhouse gas emissions.[6] Its cap would apply to power plants, large industrial facilities, domestic producers and importers of petroleum and other fossil fuels, natural gas local distribution companies, bulk importers of gases with greenhouse potential, and geologic sequestration sites. It would not apply to sources emitting less than 25,000 metric tons of CO2-equivalent a year, but EPA could adopt emission standards to categories of sources below that threshold.

The Markey bill’s cap would apply to the same source categories, but would have a lower exemption threshold of 10,000 metric tons a year.[7] The Markey bill also calls on EPA to adopt performance standards for certain sectors that would fall outside the cap, such as landfills and combined animal feeding operations. Also, in a move to limit construction of conventional coal-fired power plants, the Markey bill would require that all such new plants commencing construction after January 1, 2009 achieve 85 percent capture and sequestration of their CO2 emissions.

The size thresholds in both bills may sound quite large, considering that under the existing version of the Clean Air Act most sources emitting more than 100 tons of conventional pollutants are subject to more stringent PSD permitting requirements. However, the higher numbers are reflection of the fact that combustion generates very large amounts of CO2. California has adopted a performance standard for power generation of 1100 pounds of CO2 per megawatt hour, which is roughly equivalent to the performance of an existing natural gas-fired combined cycle turbine. Any turbine operating at that emission rate and larger than about 3 megawatts would be above the Markey threshold. Such a unit would be larger than many industrial applications, but smaller than most units used commercially for power generation.

Offsets

Both bills would allow regulated sources to meet a portion of their obligations using offsets – in place of some emission allowances, the source would provide documentation that a qualifying source has reduced its emissions for that year by an equivalent amount. Both bills also would limit the ability to use offsets. The Markey bill allows up to 30 percent of required allowances to be supplied through offsets, with no more than 15 percent from domestic sources and 15 percent from international sources. The Dingell-Boucher bill, in keeping with its phase in of emission reductions, allows only 5 percent of the compliance obligation to be met by offsets in the first five years, with the amount growing over time to 35 percent by 2024.

Banking and Borrowing Emission Allowances

Both bills would allow banking or borrowing emission allowances. Emission allowances will have a vintage – they are intended to apply to emissions in a particular year. “Banking” is putting aside allowances for a given year to be applied to future year emissions. “Borrowing” is the use of allowances for future years to meet a current year obligation. The Markey bill would allow a source to borrow allowances to meet up to 15 percent of its obligations in a given year, but that “loan” would have to be repaid over five years, with 10 percent interest. The Dingell-Boucher bill would not impose interest if the allowances were dated for the next calendar year. But allowances more than a year in the future would have to be repaid with interest, with the rate increasing farther into the future, and with no borrowing allowed more than five years into the future.

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