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Federal Climate Change Bill Works Its Way Through the 111th Congress: Update As of Day 134

May 20, 2009

The House Energy and Commerce Committee is spending this week marking up the American Clean Energy and Security Act of 2009 (H.R. 2425), a massive 946 page energy and climate change bill, released on May 15, 2009 by its sponsors, Committee Chairman Henry Waxman and Subcommittee Chair Edward Markey. House Republicans have proposed a blizzard of amendments, but with House members voting along party lines, it appears that the bill will emerge from Committee later this week largely as proposed.

The Senate is also working on energy legislation, with its focus so far on electrical transmission siting and renewable electricity standards. See the companion story, Sparks Fly as Agencies, Courts, States, and Congress Battle Over Who Is In Charge of Transmission Lines in this edition of Environmental News. Senate Majority Leader Harry Reid appears happy to let the House go first on broad climate change legislation, but will certainly take up the issue later this year if the House passes the Waxman-Markey bill.[1]

EPA, meanwhile, is holding public hearings this week in Seattle and Virginia on its proposed finding under the Clean Air Act that greenhouse gas (“GHG”) emissions endanger public health and welfare. See EPA Proposes Regulating Greenhouse Gases Under Clean Air Act, Marten Law Group Environmental News (Apr. 17, 2009). EPA has said it will move forward with regulation under the Clean Air Act if Congress fails to enact greenhouse gas regulation first.

H.R. 2425: All The GHG Reduction Ideas In One Basket

H.R. 2425 would establish an economy-wide cap-and-trade program to reduce GHG emissions 20 percent by 2020, and 83 percent by 2050.[2] It offers something for too many interest groups to count -- transition assistance to energy-intensive, trade-dependent industries, financial assistance to low income consumers affected by higher energy prices, clean energy research and development funding, and worker training funds.[3] The proposal goes well beyond establishing a cap-and-trade program. Specific provisions in the bill which affect the electric utility sector, transportation, and energy efficiency are discussed in this article.

H.R. 2425’s GHG Cap-And-Trade Program

Congressman Markey offered a bill last year that called for nearly 100 percent distribution of emission allowances by auction, with a substantial part of auction proceeds distributed to lower income individuals.[4] President Obama, who supported a 100 percent auction approach during last year’s campaign, hoped that the money raised from regulated industries would help plug the nation’s budget gap and/or fund health care reform. But there was steady erosion of support for the 100 percent auction approach. An alternative to last year’s Markey proposal came from former Energy Committee Chairman John Dingell and Congressman Boucher, who offered up four alternatives for distributing emission allowances, ranging from full auction, to partial auction, to free distribution to existing sources. See Three Key Issues Emerge in Congressional Climate Debate, Marten Law Group Environmental News, (Oct. 16, 2008). As discussed below, the current version of H.R. 2425 would allocate the majority of allowances for free, while only a small portion would be distributed via federal auction.

H.R. 2425 also appears to resolve a long-running debate among House Energy Committee Democrats over how fast emission reductions should occur. Last year, Congressman Markey offered a bill targeting 20 percent emission reductions by 2020, and 85 percent by 2050.[5] A competing proposal from former Committee Chairman John Dingell and Congressman Boucher would have begun with modest reductions (6 percent by 2020), but then would have accelerated to an 80 percent reduction by 2050.[6] Congressmen Dingell and Boucher argued that a slower start to emission reductions would foster new technologies that could be commercialized within 10 to 15 years, and ultimately would provide the most cost effective path. The proposal that Chairman Waxman and Congressman Markey put before the Energy Committee on March 31 contained essentially the same emission reduction rates as last year’s Markey bill.[7]

During the committee’s recent deliberations, Congressman Boucher has remained a leader of the Democrats advocating for slower initial reductions, accelerating over time.[8] The pace of reductions and the plan for distributing emission allowances appear to have been the major sticking points among the committee members.

The Pace of Emission Reductions

H.R. 2425 has stuck close to the discussion draft released in March, 2009 by Congressmen Waxman and Markey, but offers a bit of relief to capped sources during the early years of its cap-and-trade program. The bill sets economy-wide goals for reducing GHG emissions (compared to a 2005 baseline) of 3 percent by 2012, 20 percent by 2020, 42 percent by 2030, and 83 percent by 2050.[9] Capped sources would have to achieve a 3 percent reduction by 2012, but would be given a slightly lower objective for 2020 than the economy-wide goal: a reduction of 17 percent from their collective emissions in 2005.[10] However, the reduction targets for capped sources would be equal to the economy-wide goals in 2030 and 2050.

The bill would cap emissions from electricity generation, fluorinated gas manufacturers, and liquid fuel refiners and importers beginning in 2012. Industrial sources that emit more than 25,000 tons of GHGs would be covered beginning in 2014, and local natural gas distribution companies would be covered beginning in 2016.[11] Regulated sources would be required to obtain allowances to cover all of their GHG emissions during each reporting period.

The bill would allow regulated sources to bank allowances for use in future years, or borrow allowances from one year into the future. It also would allow sources to obtain some of their allowances in the form of offsets generated by emission reduction projects.[12] However, only a portion of the total required allowances could be obtained from offsets, and sources would be required to obtain a mix of domestic and international offsets as well.

Allocating Emission Allowances

A cap-and-trade system seeks to reduce emissions by requiring regulated sources to obtain emission allowances and limiting the number of allowances that are available. By letting regulated entities trade allowances, the system will, in theory, encourage those able to reduce emissions at the lowest cost to do so, either to avoid the cost of purchasing allowances or to free up allowances to be sold or traded to other emitters. The fact that a cap-and-trade system invests each emission allowance with marketable value has been lost on no one. It is, therefore, not a surprise that the plan for allocating allowances has been perhaps the most hotly contested part of the Congressional debate over cap-and-trade legislation.

As discussed above, President Obama and others came to this process favoring federal auctioning of 100 percent of emission allowances, followed by distribution of the auction proceeds to various programs. H.R. 2425 takes a very different approach: initially, only about 15 percent of allowances would be auctioned. The rest would be distributed for a variety of purposes, including consumer protection, transition assistance for energy-intensive, trade-exposed industries, investments in energy efficiency and clean energy technologies, and other public purposes such as preventing tropical deforestation, adaptation to climate change, and worker assistance and job training.[13] Thus, instead of allocating auction revenues to various programs, the bill would grant the allowances themselves to those programs, and allow States or other recipients to sell the allowances to support the specified programs.

Some of the allowances would be distributed to regulated GHG emitters, initially at no cost. For example, 15 percent of the allowances available in 2014 would go to energy-intensive, trade-exposed industries such as aluminum, steel, glass, pulp and paper, and cement, with this assistance phased out by 2025. Domestic refineries would receive 2 percent of allowances starting in 2014, and ending in 2026. And in a move to protect electricity consumers, the electricity sector would receive 35 percent of the allowances, representing 90 percent of their current emissions. Most (30 percent of total allowances) would go to local power distribution companies, which would be required to use them to protect consumers from price increases. The free allocation to the electricity sector would phase out between 2026 and 2030. Similar grants of allowances would be made to local natural gas distributors, and to States to benefit users of home heating oil and propane.

Implications of Allocating Allowances to Programs

Some of the practical implications of the bill’s emphasis on allocating allowances to non-emitting activities relates to the secondary market. Under the proposed allocation approach, a significant proportion of the allowances would be distributed to entities (such as States) that do not have actual compliance obligations under the program. These entities would then be required to monetize their allowances through secondary trades, either to entities with compliance obligations or to investors. There will also be a corresponding scarcity of emission credits distributed to entities with compliance obligations (either through allocations or limited auctions), so they will be required to source additional allowances on the secondary market (or obtain offset credits or reduce their emissions). As a result, the proposed allocation scheme will likely spur the development of a robust secondary market for emission allowances.

By way of comparison, the Regional Greenhouse Gas Initiative (RGGI), North America’s only functioning GHG cap-and-trade program, relies primarily on auctions to distribute emission allowances. RGGI has held three auctions since September 2008, and the vast majority of allowances have been purchased by entities with compliance obligations (as opposed to investors, or organizations looking to shelve allowances). For example, during the March 18, 2009, auction, compliance entities won 78 percent of the 2009 vintage allowances and 93 percent of the 2012 vintage allowances.

Regulators have predicted that a cap-and-trade program such as H.R. 2425 could result in a $2 trillion commodity futures and options market that surpasses traditional commodities such as oil and gas within five years, and a jurisdictional battle over which federal agency should oversee that market is brewing. H.R. 2425 proposes vesting the Federal Energy Regulatory Commission (FERC) with authority to regulate the market for emission allowances and offset projects – including developing regulations within 18 months to ensure market transparency and prohibit market manipulation. FERC is overseen by the House Energy and Commerce Committee and has jurisdiction over spot and forward trades of physical power. Under the bill, FERC would also have enforcement authority, including levying civil penalties up to $1 million for trading rule violations. H.R. 2425 would also delegate authority to the President to convene a working group to determine which agency should regulate the allowance derivative market.

There is strong Congressional and industry support, however, for vesting the Commodity Futures Trading Commission (CFTC) with authority over the emission derivative market. The CFTC has exclusive jurisdiction over, and regulates almost all aspects of, futures, option, and commodities trading. The CFTC has experience regulating environmental derivatives under the Clean Air Act Acid Rain Program (SO2 and NOx futures transactions on NYMEX and the Chicago Climate Futures Exchange).

Earlier this year, the Agriculture Committee passed H.R. 977 (The Derivatives Market Transparency and Accountability Act of 2009). Among other things, that bill defines GHG emission allowances as a commodity under the Commodity Exchange Act. Emission allowances and offset credits would be required to be traded via designated markets subject to CFTC jurisdiction. The International Emissions Trading Association, whose members include energy and financial companies, is advocating for CFTC oversight of markets for allowances, offset, and related financial products.

Other Energy Provisions of H.R. 2425

In addition to the proposed cap-and-trade program, H.R. 2425 includes a broad range of renewable energy, transmission, transportation, and energy efficiency provisions. In the electric utility sector, the bill would establish a national renewable electricity standard, requiring utilities to meet 20 percent of their electricity requirements by 2020 from renewable sources and new conservation measures.[14] It would impose an emissions performance standard on coal-fueled power plants permitted after 2020, effectively making continued development of such plants contingent on the success of carbon capture and sequestration technology.[15] It would foster regional planning for the electric transmission grid, and set goals for large utilities to reduce peak electricity demand using “smart grid” technology.[16]

For the transportation sector, President Obama’s announcement this week of the Administration’s intent to adopt more stringent federal vehicle fuel efficiency standards and first-ever federal GHG emission standards[17] effectively moots H.R. 2425’s provisions directing EPA and U.S. DOT to harmonize, to the maximum extent possible, federal fuel standards with California’s GHG emission standards for light duty vehicles.[18] See By Taking Action on Fuel Economy Standards, President Orders Automakers to Produce More Fuel Efficient Cars, Marten Law Group Environmental News (Jan. 29, 2009).However, the bill has other important transportation provisions. It would, for example, require states to reduce transportation sector emissions in towns with population over 200,000, or face sanctions.[19] It also encourages development of plug-in electric vehicles, and the infrastructure needed to support their deployment.[20]

And finally, the bill would impose new energy efficiency requirements on buildings, lighting, appliances, and industrial facilities.[21] Among these provisions is direction to the Department of Energy to work cooperatively with code-setting organizations to establish substantially higher energy efficiency standards in building codes – 30 percent higher in 2010 and 50 percent higher in 2016 – and to adopt the building code standards on a federal basis if state and local code-setting organizations do not adopt them voluntarily.[22]

Conclusion

Chairman Waxman clearly believes he has the votes to move H.R. 2425 out of the Energy Committee this week. If so, we can expect to see the House consider this legislation later this summer. At that point, attention will shift back to the Senate, where the prospects for comprehensive climate change legislation are said to face stiffer opposition. If Congress fails to act, we can expect to see EPA do so under existing authority. One thing that is for certain is that there will be no business as usual scenario.

For more information, please contact any member of Marten Law Group’s Climate Change practice group.

[1] E&E News, Deadline may come and go on Senate energy bill (May 13, 2009) (subscription required)

[2] H.R. 2425, Title III: “Reducing Global Warming”

[3] H.R. 2425, Title IV: “Transitioning To A Clean Economy.”

[4] See H.R. 6186.

[5] Congressman Markey’s 2008 bill, H.R. 6186.

[6] See Three Key Issues Emerge in Congressional Climate Debate.

[7] March 31 Waxman-Markey Draft.

[8] BNA Environment Reporter, 40 ER 981 (May 4, 2009).

[9] H.R. 2425, Section 311 (proposed Clean Air Act section 702).

[10] H.R. 2425, Section 311 (proposed Clean Air Act section 703).

[11] H.R. 2425, Section 311 (proposed Clean Air Act section 722).

[12] Id.

[13] Chairman’s Summary of Proposed Allowance Allocation (May 14, 2009).

[14] H.R. 2425, Title I, Subtitle A: “Combined Efficiency and Renewable Electricity Standard”.

[15] H.R. 2425, Title I, Subtitle B: “Carbon Capture and Sequestration”.

[16] H.R. 2425, Title I, Subtitles E and F.

[17] Washington Post, Obama Announces First Nationwide Regulation of Greenhouse Gases (May 19, 2009).

[18] H.R. 2425, Section 221.

[19] H.R. 2425, Section 222.

[20] H.R. 2425, Sections 121-124.

[21] H.R. 2425, Title II: “Energy Efficiency”.

[22] H.R. 2425, Section 201.

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