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One Way or Another* – Senate Climate Change Bill Introduced; EPA Proposes to Regulate GHGs From Stationary Sources; And Court Allows GHG Nuisance Suit to Proceed

October 1, 2009

Climate change legislation moved off the back burner again this week, as Senators John Kerry and Barbara Boxer introduced the Senate version of a bill that would establish a national greenhouse gas (“GHG”) cap-and-trade program.

Climate change legislation moved off the back burner again this week, as Senators John Kerry and Barbara Boxer introduced the Senate version of a bill that would establish a national greenhouse gas (“GHG”) cap-and-trade program. On the same day, EPA, in a move calculated to highlight the alternatives to legislative action, released a proposed rule that would regulate GHG emissions from large stationary sources under existing Clean Air Act permitting programs – primarily affecting the same sources that must begin tracking their GHG emissions on January 1, 2010, under a GHG reporting rule EPA finalized last week.[1] And the judicial branch has weighed in as well, with a 2nd Circuit decision that allows the courts to hear a nuisance claim against GHG emissions from the nation’s largest utilities, on grounds that neither Congress nor EPA has yet “preempted” the field.[2]

Now that all three branches of the government have put GHG trains in motion, the pressure for a legislative resolution will be increasing. Climate legislation supporters hope that senators who remain on the fence, faced with clearly visible alternatives of regulation or litigation, will warm to a national GHG cap-and-trade program. The impetus for regulatory action also will remain strong, as the Obama Administration also must consider upcoming international negotiations on a successor agreement to the Kyoto Protocol, the main provisions of which run out in 2012. But whether these multiple tracks will lead to a clean resolution, or to a train wreck, remains to be seen.

The Kerry-Boxer Bill

The 821-page climate change bill introduced this week by Senators John Kerry and Barbara Boxer, Chairmen respectively of the Senate Foreign Relations and Environment Committees, stakes out positions on several key issues, such as the pace of emission reductions, who should receive free emission allowances, how emission offset credits should be administered, and how the federal cap-and-trade program relates to other federal Clean Air Act requirements and State air programs. But the bill’s authors also have anticipated the negotiations that are ahead of them, remaining silent for example on the share of available emission allowances that would be apportioned to particular interests. This and other issues are likely to be at the center of Senate deliberations.

The legislation is almost certain to undergo significant changes in the coming weeks – and perhaps months – if it is to garner the votes needed to clear the Senate. After the bill was released, Senator Baucus, Chairman of the Finance Committee, reiterated his committee’s desire to be heard on how emission allowances are allocated, and presumably they will have views on regulatory oversight of the offset market as well. Senator Lincoln, Chairman of the Agriculture Committee, also has said her committee wants an opportunity to address the impact of the bill on the agricultural sector. Others have said they want to see more support for nuclear energy, and better protection for energy intensive, trade dependent industries.

While the Kerry-Boxer bill calls for national energy efficiency building standards, it does not include the wide-ranging energy provisions found in the House-passed bill, such as a national renewable electricity standard, expanded federal role in siting electricity transmission lines, appliance efficiency standards, and a “smart grid” program.[3] However, those energy issues, and others, already are addressed in S. 1462, the “American Clean Energy Leadership Act,” reported out by the Senate Energy Committee in July of this year. No doubt later Senate action will include combining these two bills in some fashion, assuming the Kerry-Boxer bill also advances through the Senate committee process.

Kerry-Boxer’s Cap-And-Trade Program

The Kerry-Boxer bill would set GHG emission reduction goals economy-wide and for capped sources: 3 percent below a 2005 emissions baseline by 2012; 20 percent below baseline by 2020; 42 percent by 2030; and 83 percent by 2050.[4] The 2020 target is more aggressive than the 17 percent reduction by that date proposed under the House-passed bill.[5] Other than the 2020 objective, however, the two bills propose the same pace of emission reductions over the next forty years.

As with the House bill, the main focus is on reductions from capped entities, which would be required to obtain emission allowances or emission credits for each ton of GHG that they directly emit, or that is embedded in the fossil fuels they produce or distribute. By capping the GHG content of liquid fuels produced by refineries or imported into the country, the bill indirectly regulates the transportation sector, as well as home heating oil. By requiring local natural gas distributers to obtain emission allowances, the bill reaches space heating that relies on that fossil fuel, as well as many commercial and industrial natural gas users.

The cap on GHG emissions would take effect in stages that track the House-passed bill. Electric utilities would be required to comply in 2012, for power generated burning coal and natural gas.[6] Petroleum and coal-based liquid fuel producers and importers also would have to comply in 2012.[7] Industrial sources would be covered beginning in 2014, and local natural gas distributers in 2016.[8]

Allocating Emission Allowances

At one time, it seemed that cap-and-trade legislation would require most emission allowances to be auctioned off to regulated sources. But that approach was substantially abandoned in the House bill, which ended up directly allocating 85 percent of the allowances, in the initial years of the program, to utilities, natural gas distributers, trade-dependent industries, state, localities, and others to support a variety of interests (low income consumers, clean energy developers, worker retraining, reforestation in developing nations, etc.).

The Kerry-Boxer bill similarly proposes to allocate emission allowances to a long list of programs and interests, but it leaves open for further discussion the actual percentages that would be allotted to each. The bill proposes direct allotments to benefit electricity, natural gas, and home heating oil consumers (through allocations to local distribution companies), domestic fuel producers (through allocations to domestic refineries), and trade-dependent, energy-intensive industries.[9] It also would distribute allowances to support research programs, worker training, State energy efficiency, GHG reduction and adaptation programs and, deployment of carbon capture and sequestration for power plants, among other new programs.

To control the price of emission allowances, the bill provides for a market stability reserve, through which EPA could auction off allowances at a price up to $28 a ton (with an inflation adjustment), with only covered sources being allowed to take part in the auctions.[10] EPA also would auction off allowances to finance refunds to low- and middle-income consumers, clean vehicle technology grants, and the other programs funded by the bill.[11] It also calls for auctioning off 25 percent of allowances for a federal deficit reduction account, to assure that the legislation has a neutral budget effect.[12] No doubt this provision will be revised as cost estimates for the legislation are refined. Finally, the bill allows EPA to auction allowances on consignment for others, such as the states, which would receive grants of allowances under various programs.

Emission Offset Credits

The Kerry-Boxer bill, like the House-passed version, would allow capped sources to obtain some of their required emission allowances in the form of offset credits.[13] An “offset credit” is a voluntary emission reduction made by a source that is outside of the federal cap, and must be in addition to any reduction required by other laws. Up to 2 billion tons of GHG offsets could be used annually toward emission allowance requirements, divided pro rata among covered sources. In a departure from the House, the Kerry-Boxer bill would limit international offsets to no more than one quarter of the total offsets used (the House bill would allow up to 50 percent international offsets, or more if the domestic offset supply is inadequate). Kerry-Boxer also would discount international offsets, requiring 1.25 international offset credits to equal one emission allowance.

In the House, there was substantial debate over which federal agency would oversee the offset program. The bill that emerged from the Energy and Commerce Committee would have assigned that responsibility to EPA. At the insistence of farm state representatives, who were concerned about how EPA would treat agriculture and forestry-related offsets, the program was shifted to the Department of Agriculture. Senators Kerry and Boxer have finessed this issue somewhat, assigning implementation responsibility to the President, who may delegate the program as he deems appropriate.[14] Farm state interests in the Senate are expected to seek changes shifting the program to the Department of Agriculture, as in the House-passed bill.

In another departure from the House bill, Kerry-Boxer also would create an “Office of Offsets Integrity” at the Department of Justice.[15] The bill emphasizes the office’s role in civil enforcement of laws related to emission offsets. However, there are bound to be concerns that this signals an enforcement-oriented regulatory focus, since the Department of Justice is not known for emphasizing compliance assistance.

Preemption of Other Federal and State Requirements

As noted at the outset of this article, on the same day the Kerry-Boxer bill was introduced, EPA proposed rules that would bring GHG emissions under the existing Clean Air Act new source review and Title V air operating permit programs. The House bill would exempt GHG emissions from these programs. The Kerry-Boxer bill would not. Thus, if EPA finalizes the regulations it has just proposed, the Kerry-Boxer approach would leave sources open to regulation under both programs.

Both the House bill and Kerry-Boxer would preempt state and regional cap-and-trade programs for five years, from 2012 to 2017, but the Kerry-Boxer bill delays the preemption if the federal program is “substantially delayed.” Neither bill would preempt states from adopting or enforcing other types of air pollution laws affecting GHG sources.

Other Notable Provisions

The Kerry Boxer bill contains a thin chapter on nuclear power,[16] which some senators will want to see expanded. The bill offers significant support for development and deployment of carbon capture and sequestration (“CCS”),[17] which may be important to senators from coal-producing and coal-dependent states. It also provides a performance standard for coal-fired power plants tied to the deployment of CCS,[18] which will be less popular with those senators.

The bill directs EPA to develop a GHG emissions registry – a task already completed last week, when EPA issued a mandatory emission reporting rule.[19] Like the House bill, it also directs EPA to develop GHG emission standards for heavy-duty trucks and offroad engines.[20] It would place new obligations on states and metropolitan areas to achieve transportation-related GHG reductions, through a planning process overseen by EPA and the Department of Transportation.[21] It also would support a variety of advanced energy research, as well as climate change adaptation programs.[22]

Conclusion

With the bill they introduced this week, Senators Kerry and Boxer are leading a bid to return climate change legislation to the Senate’s agenda for this fall. The steady drumbeat of GHG regulations from EPA – a proposed stationary source rule this week, a final GHG reporting rule last week, proposed car and light-truck standards the week before – and the renewed threat of litigation over the impact of GHG emissions from major sources, are stoking the fires, turning up the heat on the legislative process. But the actions by EPA and the courts also raise the stakes if the legislation should fail. Increasingly, it is looking like GHG emissions are going to be limited, one way or another.

For more information regarding climate change legislation, please contact any member of Marten Law Group’s Climate Change practice.

* Blondie (1979): “One way, or another, I’m gonna find ya, I’m gonna getcha getcha getcha …”

[1] See EPA Issues Mandatory Greenhouse Gas Reporting Rule; Monitoring To Begin January 1, 2010, Marten Law Group Environmental News (Sept. 23, 2009).

[2] See Second Circuit Allows Federal Nuisance Claims for Global Warming to Proceed, Marten Law Group Environmental News (Sept. 23, 2009).

[3] See 111th Congress, Day 171: Following Heavy Presidential Lobbying, House Passes Energy and Climate Change Bill; All Eyes Now on the Senate, Marten Law Group Environmental News (June 29, 2009).

[4] Proposed CAA §§ 702 and 703.

[5] H.R. 2454, § 311.

[6] Proposed CAA § 722(b)(1).

[7] Proposed CAA § 722(b)(2).

[8] Proposed CAA § 722(c).

[9] Proposed CAA § 771(a) and related sections.

[10] Proposed CAA § 726.

[11] Id.

[12] Proposed CAA § 771(c).

[13] Proposed CAA § 722(d).

[14] Kerry-Boxer Bill, Division B, Title I, Part D.

[15] Proposed CAA § 743.

[16] Division A, Title I, §§ 131-133.

[17] Division A, Title I, § 121.

[18] Division A, Title I, § 124.

[19] See note 1.

[20] Division A, Title I, § 111.

[21] Division A, Title I, §§ 112-113.

[22] Division A, Title II.

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