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Senate Climate Bill Introduced Amid Considerable Fanfare, and an Uncertain Future

May 14, 2010

Senators Kerry and Lieberman released their much-anticipated cap and trade legislation on May 12, 2010. The Kerry-Lieberman bill takes its place alongside H.R. 2454, the American Clean Energy and Security Act (“ACES”), enacted by the House in June, 2009. If it becomes law, electric utilities will have to buy the right to emit greenhouse gases (“GHGs”), and gasoline and fuel distributors (and/or their customers) will pay the government for the carbon content of their fuels. The bill would take effect in 2013, with additional requirements extending to industrial sources and natural gas suppliers by 2016. Despite its seemingly long odds of passage, the public release of this bill marks a significant milestone in Congressional consideration of climate change legislation.

The centerpiece of the wide-ranging Kerry-Lieberman bill is a cap-and-trade program designed to reduce the nation’s GHG emissions 17 percent by 2020 and 80 percent by 2050. The bill has many similarities to the House bill, H.R. 2454. Some significant House provisions, such as a national renewable energy standard for utilities, do not appear in the Kerry-Lieberman bill, but are contained in a bill that was reported out last summer by the Senate Energy Committee and is likely to be merged with Kerry-Lieberman before the legislation reaches the Senate floor.

I. Key Provisions of the Kerry-Lieberman Bill

  • The Senate bill’s limits on GHG emissions would begin in 2013, which is a year later than under H.R. 2454. Initially, the Senate bill would cap emissions from the electric power sector, transportation fuels, and other refined oil products. In 2016, it would expand to large industrial GHG sources (cement plants, smelters, pulp mills, food processing plants, and other industrial sources), and to distributors of natural gas;
  • Most regulated sources would purchase emission allowances or offset credits through federal auctions or a regulated market. For gasoline and other refined products, a fixed allowance price would be set quarterly, and allowances for these products would be purchased directly from the government;
  • During the first 12 years of the program, free allowances would be distributed to source of GHGs in order to reduce program costs to consumers of electricity, natural gas, and home heating oil, and to buffer the impact on trade-vulnerable industries and domestic refineries;
  • Some allowances, however, would be distributed to public sector entities during the same 12 year period. Those public entities could then sell them to raise money to support energy efficiency programs, adaptation programs and research and development of new technologies. Allowances would be sold to new or modified GHG sources coming online;
  • After 2025, an escalating portion of the allowances would be auctioned off, and the proceeds redistributed to individuals through a personal income tax credit, adjusted by family size but not income;
  • The Kerry-Lieberman bill would preempt state GHG cap-and-trade programs, and exclude GHGs from the Clean Air Act’s existing construction and operating permit programs. This would nullify the GHG tailoring rule issued by EPA on May 13, 2010. See companion article in this Newsletter;
  • To encourage coastal states to accept new offshore oil & gas development, the bill offers revenue sharing. But States could also veto on new leasing within 75 miles of their coastlines;
  • The bill also contains incentives to promote nuclear power, expanding incentives enacted in 2005 and 2007, and offering federal financial support for 6 more nuclear power plants.
  • Other provisions encourage carbon capture and sequestration and provide support for energy efficiency programs, adaptation to climate change, and electric and low-emission vehicles,

II. Comparison To House-Passed Climate Bill

A chart comparing the provisions of the Kerry-Lieberman bill with H.R. 2454 can be found here. The most important differences are discussed below.

GHG Reductions – Targets, Schedule, and Scope

The House-passed climate bill H.R. 2454, contains essentially the same GHG reduction goals as the new Senate bill. The House has called for reducing GHG emissions 17 percent by 2020 and 83 percent by 2050, compared to 2005 levels.[1] The Senate bill adopts these same targets.[2] The only difference occurs in the first few years. The House bill would require a 3 percent reduction by 2012, while the Senate bill calls for a 4.75 percent reduction by 2013. Under both bills, limits on GHG emissions would take effect in several stages, but both call for an economy-wide cap-and-trade system by 2016.

The greatest difference between the House and Senate emission caps is the approach they take to gasoline and other transportation fuels. The House bill would place producers and importers of oil and coal-based liquid fuels (e.g., gasoline, diesel, jet fuel, fuel oil) under the same cap-and-trade system as other GHG sources, beginning in 2012.[3] They would have to obtain emission allowances or offset credits based on the carbon content of their fuels. The Kerry-Lieberman bill, on the other hand, requires the makers or importers of those fuels and refined oil products to purchase allowances directly from EPA, at a price tied to federal allowance auction prices.[4]

The Kerry-Lieberman bill also would establish a reserve price for federal allowance auctions (effectively a price floor) of $12 a ton in 2013, escalating at 3 percent a year plus the consumer price index.[5] Like the House bill, Kerry-Lieberman also includes a reserve of allowances that may be used to lower the market price of allowances, by auctioning them with a price ceiling, which would start at $25 a ton in 2013, and escalate at 5 percent a year thereafter, plus the consumer price index.

Distribution of Emission Allowances

Much of the politicking in the House in the weeks before it passed H.R. 2454 related to the allocation of free emission allowances. These allocations were intended to serve three basic purposes: to reduce the cost of GHG controls to energy consumers, buffer the impact on energy-intensive industries that are vulnerable to competition from other regions that do not have GHG controls, and to finance a variety of projects and initiatives. In the end, the House bill ended up directly allocating 85 percent of the allowances, in the initial years of the program, to utilities, natural gas distributers, trade-dependent industries, and to states, localities and others to support a variety of interests (low income consumers, clean energy developers, worker retraining, reforestation in developing nations, energy efficiency programs, and research and development).

The Kerry-Lieberman bill starts out with the same sort of allowance distribution called for in the House bill, using many of the same percentages as H.R. 2454.[6] But beginning in 2025, the proceeds from auctioning 8 percent of allowances would be redistributed directly to consumers through an income tax credit.[7] By 2035, that percentage would increase to proceeds from 78 percent of allowances.[8] Kerry-Lieberman also provides greater assistance to reducing emissions from transportation through cleaner vehicles and transportation efficiency.

Emission Offset Credits

The House-passed bill would allow capped sources to obtain some of their required emission allowances in the form of offset credits. 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. H.R. 2454 would allow use of up to 2 billion tons of GHG offsets annually, divided pro rata among covered sources. It would allow up to 50 percent of those offsets to come from international projects, or more if the domestic offset supply is inadequate. The Kerry-Lieberman bill also allows up to 2 billion tons of emissions to be offset annually, but limits international offsets to 25 percent of the total.[9]

Kerry-Lieberman would set criteria for offset projects, including verification requirements, and would integrate offsets created under existing state and private emission offset programs. There was substantial debate in the House over which federal agency should oversee the offset program. Initially, this responsibility was assigned to EPA. But farm state Representatives were concerned about how EPA would treat agriculture and forestry-related offsets, and successfully pushed for the parts of the program governing agriculture and forestry-related offsets, to be shifted to the Department of Agriculture. The Kerry-Lieberman bill assigns joint responsibility for the offset program to EPA and the Department of Agriculture.

Carbon Market Regulation

There is significant concern in the Senate that a national carbon market not be subject to the sort of manipulation that Enron and others perpetrated in the California electricity market (which triggered that state’s energy crisis in 2000-01 and disrupted electricity markets throughout the West). Responding in part to those concerns, the Kerry-Lieberman bill takes a stronger line on regulation of the GHG allowance market than the House-passed bill. Participants in the market for GHG instruments (allowances and offsets) would be limited to those with compliance obligations under the cap-and-trade program and registered market participants.[10] All trading in allowances and offsets would have to occur through registered clearing organizations, and there would be limits on short selling and swap transactions.

Effect on Clean Air Act Programs

Both the House bill and Kerry-Lieberman would exclude GHGs emissions from the Clean Air Act’s existing PSD construction permits and its Title V operating permits. Both bills would allow EPA to set technology-based new source performance standards for sources that are too small to be subject to the cap-and-trade program, but exempt capped sources from those rules.

Twenty-three states and four Canadian providences are members of North America’s three regional greenhouse gas trading programs: the Regional Greenhouse Gas Initiative (RGGI), the Western Climate Initiative (WCI), and the Midwest Greenhouse Gas Reduction Accord (MGGRA). If they become fully operational, these programs would cover over half of the United States’ GDP and over 37-percent of the United States’ greenhouse gas emissions.[11] The prospect of parallel (yet potentially inconsistent) markets and compliance frameworks has been one of the principal drivers behind the call for a unified Federal cap-and-trade program.

The House bill struck a compromise on preemption of these state GHG control programs. Section 334 of the H.R. 2454 expressly prohibits states from implementing a cap-and-trade program between 2012 and 2017. The bill, however, did not preempt other forms of state-level greenhouse gas regulation, including emission requirements for stationary sources and motor vehicles or low-carbon fuel standards.

The Kerry-Lieberman bill would preempt all state cap-and-trade programs, and all other state regulation of GHG emissions from stationary sources.[12] It would, however, allow states to continue with GHG emission standards for vehicles, like those developed by California and adopted by a number of states.

Offshore Oil & Gas

As an incentive to opening new offshore areas for oil and gas exploration and development, the Kerry-Lieberman bill offers a share of the revenue from new development to coastal states and local communities. But recognizing (particularly in light of the Gulf spill) that many states oppose offshore drilling, the bill also lets coastal states block any leasing within 75 miles of their shore lines, and to petition for closure of specific areas within that zone to oil and gas leasing. The Department of Interior would also have to assess spill risks as part of their planning for OCS lease sales, and if that assessment shows that a spill from a lease area would directly injure an a nearby state’s coastal economy, that state would have the option of blocking leases in that area. The House bill has no similar provisions

Senators Kerry and Lieberman have indicated their intent to include offshore oil and gas provisions in this bill during the last several months, and those plans were not changed by the Deepwater Horizon spill in the Gulf of Mexico. However, the Senators indicated that they changed some of the provisions in response to that spill. Among other things, the oil and gas provisions are preceded by a series of findings that include a call for a moratorium on new offshore drilling operations until the cause of the explosion on the Deepwater Horizon has been determined.[13]

Electricity Provisions

Hoping to attract broader political support, the Kerry-Lieberman bill also contains several provisions to promote new nuclear power plants. These include favorable tax provisions (a new investment tax credit and accelerated depreciation for new nuclear plants), an expansion of federal loan guarantees and regulatory risk insurance created in 2005 and 2007 energy legislation, creation of an expedited licensing procedure before the Nuclear Regulatory Commission, and changes in tariff rules for certain parts of nuclear power plants.[14] The House bill barely mentions nuclear power, and contains no significant new incentives.

Both the House-passed bill and Kerry-Lieberman would set CO2 performance standards for new coal-fired power plants. These standards would require a 50 percent reduction in potential CO2 emissions for plants permitted after enactment through 2019, and a 65 percent reduction thereafter. They would effectively prohibit construction of coal plants not equipped with some form of carbon capture and sequestration. These reduction levels could not be achieved through increased energy efficiency.

Kerry-Lieberman, like the House bill, also includes extensive provisions to promote commercial deployment of carbon capture and sequestration.[15] Kerry-Lieberman would be somewhat more generous in funding of this effort than is the House bill, and also offers incentives for shutting down or repowering existing coal plants. There are no similar provisions in the House bill.

No Renewable Portfolio Standards, Transmission Siting or Smart Grid Provisions

Unlike the House bill, Kerry-Lieberman does not include a national renewable energy standard, ease the siting of transmission lines, nor encourage development of a so-called “smart grid.” For more background on those provisions, as they appear in the House bill, see Federal Renewable Electricity Standard Takes Shape, Marten Law Environmental News (June 12, 2009).

Transportation and the Built Environment

Both the Kerry-Lieberman bill and H.R. 2454 and would promote electric and low-emission vehicles. The House bill offers more direct support for development and deployment of electric cars, while Kerry-Lieberman emphasizes a broader increase in the energy efficiency of transportation. Kerry-Lieberman would allocate the revenue from a significant share of emission allowances (initially, 12 percent of allowances, declining to 6.7 percent by 2034) to improving transportation efficiency.[16]

Both bills also use emission allowances to support state and Indian tribe energy efficiency programs. Kerry-Lieberman also adds a low interest loan program for energy efficiency improvements in rural areas, distributed mainly through rural electric cooperatives.[17]

As with electricity provisions, the House bill contains several energy efficiency initiatives that are not found in Kerry-Lieberman, but do correspond to similar provisions in the Senate Energy Committee’s S. 1462. These include requiring greater energy efficiency in building codes and new energy efficiency standards for lighting and appliances. Presumably all or portions of S. 1462 will be merged with Kerry-Lieberman prior to or during Senate floor deliberations.

III. Key Issues in the Senate Debate

Senators Kerry and Lieberman have been working to assemble their bill since last fall, working until recently with Senator Graham. The central difficulty they faced was the reality that putting a price on GHG emissions will have a disproportionate impact on different regions of the country. Thus, their task was to craft a mix of incentives that would sway enough Senators from affected states to produce a filibuster-proof 60-vote majority to support the legislation. Whether they will succeed in that task is likely to be the central story line in the Senate deliberations.

The Kerry-Lieberman bill also will stir opposition on a number of substantive issues, even assuming the bill advances to consideration on the merits. These include whether to preempt EPA from regulating GHG emissions under the federal Clean Air Act’s permitting programs. See the companion article on EPA’s tailoring rule in this week’s Marten Law Newsletter. EPA’s regulatory actions have sparked a series of lawsuits, and vocal opposition in Congress. Senator Murkowski (R-AK) has introduced a resolution that would nullify any EPA regulation of greenhouse gases. While the Murkowski bill has been criticized by Democrats and the White House, the Kerry Lieberman Bill would, ironically, accomplish essentially the same thing (at least for stationary sources), by preempting EPA’s regulations. There also will be debate over the related issue of preempting State GHG programs, such as RGGI and the Western Climate Initiative.. See Congress To Consider Preemption of Regional Climate Pacts, Marten Law News (April 19, 2010).

The extent to which the Senate bill would preempt the regulation of greenhouse gases under federal environmental laws other than the Clean Air Act – including the ESA and NEPA --is unclear. During Senate debate, there will likely be at least some discussion of enacting prohibitions on use of other federal laws to limit GHG emissions. Senator Voinovich (R. Oh.) has released a draft amendment ahead of the Senate bill that would: (1) explicitly preempt the state and regional programs; (2) prohibit federal, state, or local agencies or units of government from developing regulations or taking actions to restrict greenhouse gas emissions from stationary sources; (3) prohibit lawsuits regarding greenhouse gas emissions; and (4) prohibit the regulation of greenhouse gas emissions via existing environmental laws such as the Clean Air Act, NEPA, or the Clean Water Act.

Another focal point of the Senate debate will likely be the mechanism for distributing emission allowances, including which programs receive free allowances or revenue from the sale of allowances. The proposal by Senators Kerry and Lieberman to fix the price of allowances for refined oil products is already being called a tax on gasoline. There may even be debate about whether there should be any market for emission allowances, or whether they should instead all be sold at auction by the federal government. In February 2010, Senators Cantwell (D. Wa.) and Collins (R. Me) introduced the Carbon Limits and Energy for America's Renewal Act (CLEAR Act) (S. 2877), which sets out a "cap and dividend" program that would limit carbon dioxide emissions from fossil fuels. Unlike H.$. 2454 and the Kerry-Lieberman bill, the CLEAR Act would not establish an economy-wide cap and would apply only to carbon dioxide. "First sellers" of fossil fuels (i.e. those entities that sell fossil fuels into the United States' economy) would be required to purchase 100% of their emission allowances via monthly auctions. Seventy-five percent of the proceeds would be returned to consumers as monthly dividends, and the remaining 25% would fund investments into greenhouse gas reduction technology. Only regulated entities would be permitted to purchase emission allowances, and the use of offset credits to demonstrate compliance would be prohibited.

V. Conclusion

If Congress fails to complete work on the legislation this year, and absent a court-ordered injunction, EPA will begin regulating new and modified GHG sources under existing Clean Air Act permitting programs, beginning in 2011. One way or another, at least some GHG sources are likely to face controls, as early as next year.

For more information regarding the Kerry-Lieberman bill or other climate change issues, contact any member of Marten Law’s Climate Change practice.

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

[2] Kerry-Lieberman (“K-L”) Section 2001, proposed Clean Air Act section 702.

[3] H.R. 2454, proposed Clean Air Act section 722.

[4] K-L Section 2001, proposed Clean Air Act section 729.

[5] K-L Section 2101, proposed Clean Air Act section 790.

[6] K-L Section 2001, proposed Clean Air Act section 781.

[7] K-L Section proposed Clean Air Act section 781(a)(5).

[8] Id.

[9] K-L Section 2001, proposed Clean Air Act sections 733 and 753.

[10] K-L Section 2408.

[11] Pew Center for Global Climate Change, Regional Initiatives March Forward (Nov. 10, 2009).

[12] K-L Section 2501.

[13] K-L Section 1201.

[14] K-L Title I, Subtitle A.

[15] K-L Title I, Subtitle C.

[16] K-L Sections 1711 & 1712.

[17] K-L Section 1602.

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