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111th Congress, Day 171: Following Heavy Presidential Lobbying, House Passes Energy and Climate Change Bill; All Eyes Now on the Senate

June 29, 2009

After weeks of intense lobbying, and a final push from the White House, the House of Representatives on June 26, 2009, narrowly passed a massive, 1,500 page energy and climate change bill, largely along party lines.[1] H.R. 2454 (the American Clean Energy and Security Act of 2009, or ACES) would establish the first federal cap on greenhouse gas (“GHG”) emissions and an emissions trading program for covered entities (“cap and trade”). As enacted, H.B. 2454 retains most of the key elements of the bill Reps. Henry Waxman and Edward Markey introduced in May[2] but includes a number of revisions designed to win over some Midwest Democrats. Many of those changes can be found in the more than 300 page manager’s amendment released Friday morning.

Among the key provisions of the House bill are:

  • An emissions cap designed to reduce GHG emissions 17 percent by 2020 and 83 percent by 2050, compared to 2005 levels. It would require a 3 percent reduction by 2012
  • A “renewable electricity standard” requiring utilities to obtain 15 percent of their electricity from renewable sources by 2020, and reduce demand an additional 5 percent through conservation and increased energy efficiency
  • New energy-efficiency standards for buildings and appliances, and provisions that promote energy efficiency in industry
  • Transition assistance for energy-intensive, trade-dependent industries, financial assistance for low-income consumers affected by high energy prices, and worker training funds

Although the Senate has yet to produce a companion bill, the Senate Energy Committee has reported a bill that is comparable to portions of the House bill, including a renewable electricity standard for utilities, as well as appliance and lighting efficiency standards. Senate Democratic leaders have said they will begin committee work on a GHG cap-and-trade bill in July, with the expectation of bringing comprehensive energy and climate change legislation to the Senate floor this fall.[3]

Climate change bills have been introduced in Congress for several years, but this is the first bill that has gained enough support to pass either Congressional body, and could represent a game-changing evolution of U.S. energy and environmental policy. The last major piece of environmental legislation to pass Congress was the 1990 Clean Air Act amendments, passed nearly 20 years ago.

GHG Cap-And-Trade Program

The central feature of H.B. 2454 is an economy-wide cap-and-trade program, set to begin in 2012, and requiring reductions in GHG emissions of 17 percent by 2020 (compared to a 2005 baseline), and 83 percent by 2050.[4] The reductions would be achieved by requiring regulated entities – responsible for approximately 85 percent of the GHG emissions in the United States – to obtain emission allowances for each ton of GHG that they directly emit, or that are embedded in the fossil fuels they process or distribute (thus indirectly covering the transportation sector). The total number of allowances distributed or auctioned to regulated sources would be reduced each year, causing regulated sources to reduce their GHG emissions. Federal GHG emission allowances would be issued for free to a wide variety of sources in the early years of the program, with the bulk assigned to electric utilities.[5]

Limits on GHG emissions would take effect in several stages. Producers and importers of petroleum and coal-based liquid fuels (such as gasoline, jet fuel, and fuel oil) would have to obtain GHG credits for the carbon content of their fuels beginning in 2012.[6] Electric utilities also would have to obtain credits beginning in that year, for their combustion of coal and natural gas.[7] To avoid double counting, utilities would not need to obtain credits for their burning of liquid hydrocarbon fuels and petroleum coke. Industrial sources would have to comply beginning in 2014, and local natural gas distributors would have to comply in 2016.[8] As with electric utilities, industrial sources would not need credits for their use of liquid hydrocarbon fuels, or for burning certain renewable fuels. Natural gas distributers, again to avoid double counting, would not need credits for gas that they sell to other capped sources.

Several changes were made in the final negotiations to the distribution of emission allowances. For example, 1 percent of emission allowances were reserved to be distributed as “early action” compensation for entities that reduced their emissions through projects begun or offsets credits obtained before January 1, 2009.[9] The final bill also allocates 0.28-percent of allowances to incentivize the agricultural sector to undertake projects that reduce GHG emissions or sequester carbon dioxide, and to support the development of renewable energy infrastructure.[10]

The Role of Offsets

In addition to relying on allowances obtained or purchased from the federal government, regulated sources also can comply with the proposed cap-and-trade program by obtaining “offset” credits. An offset is an emission reduction made by a source that is outside of the federal cap on GHG emissions. The concept behind allowing offsets is that some unregulated sources may be able to reduce their emissions more cost effectively than certain regulated GHG sources. The theory is that by allowing the regulated source to pay an unregulated source for an offsetting emission reduction, the objective of reducing GHG emissions is still achieved, but in a more cost effective manner. For background on the role of offsets and the controversy that they engender, see Cap and Trade Proponents Struggle with Role of “Offsets”, Marten Law Group Environmental News (June 19, 2009).

The final bill made some notable changes to earlier versions of the offset program. For example, it introduces a concept called “term offset credits” which will allow regulated entities to temporarily demonstrate compliance with their emission cap via offset projects that provide short-term, but not permanent, emission reductions.[11] Entities that use term offset credits will be required to demonstrate compliance (either through the acquisition of allowances or permanent offset credits) prior to the date on which the term offset credits expire. Furthermore, entities relying on term offset credits will be required to post financial assurances equal to the cost of attaining such permanent reductions. The term offset program has the potential to play a significant role in the offset market, particularly during the program’s first decade, as it will provide an interim form of compliance while GHG reduction projects navigate a cumbersome and time consuming verification process. Furthermore, the term offset program will likely spark the interest of the forestry industry, as it would open the door for marketing offset credits based on forest management practices without the need for entering into permanent conservation easements.

In a key concession to farm state Democrats, the final bill also provides that the U.S. Department of Agriculture will have exclusive jurisdiction over agricultural and forestry offsets, while EPA will have exclusive jurisdiction over all other types of offset projects.[12]

Renewable Electricity Standards

In addition to limiting GHG emissions from electric utilities and other sources, the House bill calls for utilities to meet 20 percent of their electricity demand from renewable energy sources and increased energy efficiency by 2020.[13] Renewable sources would have to provide 15 percent of a utility’s electricity, unless the Governor of the affected state requests and obtains federal permission to increase the percentage supplied through conservation and energy efficiency. For more background on renewable energy credits in the House bill and the bill being considered in the Senate, see Federal Renewable Electricity Standard Takes Shape, Marten Law Group Environmental News (June 12, 2009).

Changes made by the manager’s amendment expand the definition of “renewable biomass” that qualifies as a potential renewable energy source.[14] The amendment also established a Federal Renewable Energy Purchase program which requires the federal government to purchase 6-percent of its domestic electricity from renewable sources starting in 2012. The requirement will, similarly to the RES, increase to 20-percent in 2020.[15]

Electric Transmission Siting

During committee deliberations over the House bill, there was strong debate over whether to include provisions regulating (or promoting) the siting of new electric transmission lines. Traditionally, transmission lines have been the responsibility of states, and not the federal government. But as reported earlier in this Newsletter[16], it has taken years in some cases to site new transmission capacity, and some members of Congress pressed for federalizing the permitting process in order to speed up the delivery of electricity from wind and solar producers, who typically are located at a far distance from power users. ACES, as passed, addresses the issue in a compromise under which the federal government is given an expanded role in siting, but not one that completely replaces the states’ authority.[17] Under the 2005 Energy Policy Act, the Federal Energy Regulatory Commission (FERC) has “backstop” permitting authority over siting interstate transmission projects in designated national energy corridors when a state has withheld necessary project approvals for over one year.[18] ACES would expand FERC’s jurisdiction over interstate transmission projects within the Western Interconnection, which includes most of the western states. The bill would authorize FERC to step in and set conditions for projects intended to transmit electricity from renewable energy sources, when (in FERC’s judgment) a state has denied or imposed “unreasonable” conditions on a siting application.

Other Energy Provisions

The bill and the manager’s amendment also include a sweeping array of energy efficiency, worker training, and green building mandates. Those provisions include, among numerous other things, goals for large utilities to reduce peak electricity demand using “smart grid” technology.[19] The manager’s amendment also calls for research into consumer behavior,[20] a proposal that may draw ridicule but that could be important to making a “smart grid” actually work. Many of the ideas behind “smart grid,” such as scheduling appliance use to occur during low power demand periods, would require consumer acceptance and cooperation.

Conclusion

House passage of H.R. 2454 marks a significant milestone in the national climate change debate. Attention now turns to the Senate, where its prospects remain uncertain. President Obama has encouraged the Senate to take up the energy and climate change legislation this fall. Should the legislation stall in the Senate, however, GHG emissions still may be regulated through other avenues. These include the now-quieted State and regional climate change initiatives, as well as EPA’s proposed endangerment finding, which would open the door to regulating GHG emissions under the existing provisions of the federal Clean Air Act.[21] Many twists and turns no doubt await as the U.S. continues to wrestle with its approach to climate change.

For more information about climate change legislation, please contact any member of Marten Law Group’s Climate Change Practice Group

[1] The House bill is estimated at 1,500 pages; it is not yet available in its final form. In late May, the House Energy and Commerce Committee reported out a bill that totaled more than 1,200 pages. Eight other House committees could have exercised jurisdiction over the legislation. Rather than refer the bill to those committees, Chairman Waxman, working with House Speaker Nancy Pelosi, negotiated changes to the bill that were captured in a massive, 310-page “managers amendment,” the text of which was not completed until the morning that the bill was considered by the full House.

[2] See Federal Climate Change Bill Works Its Way Through the 111th Congress: Update As of Day 134, Marten Law Group Environmental News (May 20, 2009).

[3] E&E Daily, House approves cap-and-trade bill, 219, 212 (June 26, 2009) (subscription required)

[4] H.R. 2454, Section 311.

[5] For more background on the cap-and-trade aspects of the bill and the plan for distribution of emission allowances, see Federal Climate Change Legislation Works Its Way Through The 111th Congress: Update As of Day 134, Marten Law Group Environmental News (May 20, 2009).

[6] H.R. 2454, Section 311 (proposed Clean Air Act Section 722)

[7] Id.

[8] Id. at subsection (c).

[9] Manager’s Amendment at pp. 194, 201-04 (§§ 782(t) and 795).

[10] Id. at pp. 194, 198-201 (§§ 782(u) and 788).

[11] Id. at pp. 183-194.

[12] Id. at pp. 268-94 (Title V).

[13] H.R. 2454, Title I, Subtitle A.

[14] Manager’s Amendment at pp. 2-4 (§ 610(a)(16)).

[15] Id. at pp. 9-11 (§ 103).

[16] See Battle Over Transmission Siting, Marten Law Group Environmental News (March 10, 2009).

[17] H.R. 2454at § 216B.

[18] Federal Power Act, § 216.

[19] H.R. 2454, Title I, Subtitle E.

[20] Manager’s Amendment at pp. 83-86 (§ 265).

[21] See EPA Proposes Regulating Greenhouse Gases Under Clean Air Act, Marten Law Group Environmental News (April 17, 2009).

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