U.S. climate change legislation — the view from Washington
By Thomas Brett
For better or worse, Canada’s federal government seems to have concluded that the way to develop the country's national Greenhouse Gas (GHG) policy is to determine where the U.S. federal government is going and act accordingly. Therefore, it is important for Canadian companies, institutions, and government agencies to understand the pace of change on greenhouse gas policy in the U.S., including when federal legislation will be enacted, when the U.S. program will actually begin and the likely general shape of the U.S. federal legislation, in so far as it’s envisaged today.
By Thomas Brett
The week of April 27th, I attended a series of meetings in Washington to obtain a current review of U.S. GHG developments, especially in the wake of the three days of hearings of the House Energy and Commerce Committee on the Waxman-Markey energy and climate change bill, introduced by Henry Waxman, the new Committee Chair, on March 31, 2009.
My group had presentations from the senior staff of both majority and minority parties of the Senate Energy Committee, counsel to the previous Republican Senate Energy Committee Chair, Senator Frank Murkowski, and a presentation from the Science Advisor to the President, Dr. John Holdren, all on the subject of Climate Change. I also spoke with the general counsel to majority leader (Waxman) of the House Energy and Commerce Committee and met with half a dozen energy lawyers with whom I have worked for many years on energy matters, to obtain their assessments of the likely path of climate change legislation.
That week also saw the Environmental Protection Agency (EPA) release its draft finding under the U.S. Clean Air Act that carbon dioxide is dangerous to public health and the environment. The significance of the finding is that, when finalized, (it is out for a 90 day comment period) it will permit the Obama Administration to draft regulations to the Clean Air Act to implement GHG emissions reduction policy. President Obama would then not need to persuade Congress to enact legislation on this subject.
Finally, the same week, the California Air Resources Board (CARB) issued a ruling that will require low emission fuels in California. This would likely impact activity in Canada’s oil sands. You will have read in the Press that a Canadian delegation made a presentation to CARB in Sacramento but CARB did not alter the decision.
There will be a "meeting of the parties" of the Convention on Climate Change in Copenhagen in December 2009. While in the view of some, this will be a powerful incentive to have legislation in place in the U.S. by that date, the majority view among parties with whom I spoke was that climate change legislation would not be enacted in 2009, primarily because it does not yet have the required 60 votes in the Senate. The majority view was that such legislation would pass in 2010.
The House of Representatives will likely pass a climate change bill this year, albeit with modifications, but under U.S. law, a bill must be passed by both the House and the Senate, the two bills reconciled in Conference, and then signed by the President.
I received several other messages, including:
- There is a strong feeling on the part of many legislators that with the economy in a severe recession, now is not the time to impose what is in effect a new tax on a large part of the U.S. economy.
- There is no appetite for an explicit carbon tax rather than cap and trade. Congress will not pass a bill with the word "tax" in it as it is considered toxic by legislators.
- The majority view is that a federal law, would pre-empt and override existing state and regional laws and initiatives, at least to the extent outlined in the Waxman bill (see below).
- On the issue of how to deal with China and India’s reluctance to agree to GHG reductions at this time, Dr. Holdren argued that the U.S. would have to enact its legislation first, ahead of equivalent legislation from India and China. They would then legislate some years later; however, he didn’t buttress the latter statement with any evidence. His view did not elicit comment from the congressional staffs, but it is worth noting that the Waxman Bill deals with situations where U.S. industry in disadvantaged relative to competing firms in non-signatory countries. (See below)
- There are other, non-GHG provisions in the Waxman bill, and the Senate is currently dealing with the "Reid bill" which deals not with GHG, but other energy issues such as national renewable energy policy standards, and federally mandated transmission corridors. It is possible that the Congress could send the President an energy bill in the fall, excluding GHG provisions.
Having provided comments on the timetable and general context, I will now summarize the key features of the Waxman bill.
On March 31, 2009, Rep. Henry Waxman (D-CA), Chairman of the House Committee on Energy and Commerce and Rep. Edward Markey (D-MA), Chairmen of the Subcommittee on Energy and Environment, unveiled a long-anticipated discussion draft of a comprehensive climate change and clean energy bill. The 648-page draft is entitled the “American Clean Energy and Security Act of 2009.” The Waxman-Markey draft borrows significantly from the recommendations of the U.S. Climate Action Partnership, as well as the Dingell-Boucher draft climate change bill released last October. Key provisions are described below.
Targets: The Waxman bill would establish an economy-wide cap-and-trade program for greenhouse gas (GHG) emissions. The program would take effect in 2012 with a cap 3% below the 2005 level of GHG emissions from covered sectors. The cap would decline thereafter to 20% below 2005 emissions by 2020 and 83% below 2005 emissions by 2050. The medium-term targets are comparable to those in the Lieberman-Warner bill (introduced in the last Congress) but more aggressive than those contemplated in the Dingell-Boucher draft introduced by the former chairman of the Committee, John Dingell, last October. The 2020 target is also more aggressive than the 14% emission reduction target proposed by President Obama.
Coverage and Point of Regulation: The program’s coverage parallels that of the Dingell-Boucher draft, and would capture about 85% of U.S. GHG emissions. As a general matter, electricity generators and large industrial sources (emitting more than 25,000 tons CO2-equivalent per year) are covered “downstream,” i.e., at the point of emissions. Refiners and other fossil-based liquid fuel producers and importers would be regulated on an “upstream” basis, as would producers and importers of fluorinated gases and other GHGs. Natural gas local distribution companies (LDCs) would turn in allowances for the emissions of their customers that are not regulated downstream. The EPA could reduce emission thresholds for certain stationary sources, thereby bringing smaller facilities under the cap over time.
Allocation of Allowances: The Waxman-Markey draft leaves unanswered three of the most contentious aspects of any climate bill: what proportion of allowances would be auctioned versus freely distributed; how any allocated allowances would be distributed; and how auction proceeds would be distributed among programs and industries. However, several programs that would be financed by appropriations in the current draft –such as CCS commercialization incentives and the “rebate” system for trade-sensitive industries – could be modified in future versions of the legislation to receive allowance distributions.
Offsets: The Waxman-Markey draft takes a restrictive approach to the use of offset credits, by discounting the value of those credits by 20% relative to emission allowances, and imposing a quantitative limit on a covered entity’s use of offset credits (with sub-limits for domestic and international offsets). This limit would gradually increase over time according to a formula provided in the legislation.
Cost Mitigation Mechanisms: “Banking” of allowances for use in meeting future compliance obligations would be permitted without limit, as would “borrowing” of allowances one year in advance. Limited borrowing from two to five years in advance (with interest) would also be permitted. In order to mitigate the potential for high allowance prices, EPA periodically would auction extra allowances from a “strategic reserve.” The minimum auction price would be fixed initially at a level that is twice the EPA-modeled allowance price for the program (therefore, reserve allowances would be acquired only if prices are significantly higher than projected). The strategic reserve would consist of a limited number of allowances borrowed from future years’ caps, as well as offset credits generated by international forest carbon projects.
International Offset Credits and Allowances: EPA would have discretion to limit the ability of a covered entity to use international allowances for compliance. International offset credits would only be recognized if an appropriate bilateral or multilateral agreement with the host country exists. The draft encourages a shift to crediting for sector-wide emission reductions in developing countries. In addition, the draft provides offset credits for activities that reduce deforestation in developing countries, provided that activities reduce deforestation nationwide.
Competitive Impacts: The Waxman-Markey draft combines two mechanisms for mitigating the trade impacts of a cap-and-trade program. First, U.S. industries with a certain level of GHG intensity and exposure to international trade would receive “rebates” financed by appropriations, which would gradually phase-out after 2020. If that system fails to protect trade-sensitive industries, importers of certain goods would be required to submit “international reserve allowances” for GHG emissions attributable to those goods, modeled after a similar program in the Dingell-Boucher discussion draft.
Market Oversight: The Federal Energy Regulatory Commission (FERC) would have responsibility for regulating the market for trading allowances and offset credits. Regulation of derivative contracts (such as futures and options) would also be required, but jurisdiction is left to the discretion of the President.
Preemption: The preemption provisions of the Waxman-Markey prohibit state and local governments from implementing cap-and-trade programs only between 2012 and 2017. States could still implement their own motor vehicle emission requirements and low-carbon fuel standards.
Coordination With Other Clean Air Act Provisions: EPA would be required to promulgate New Source Performance Standards (NSPS) for certain small stationary sources (not covered under the cap), but the draft would preclude the regulation of other larger GHG sources under other specified provisions of the Clean Air Act.
Along with the GHG provisions, the bill contains a number of the renewable energy and energy efficiency provisions.
Federal RES: Beginning in 2012, retail electricity suppliers would be required to comply with a federal renewable electricity mandate, set initially at 6% in 2012 and increasing to 25% in 2025. The program provides for tradable renewable energy credits, and allows utilities to pay a fee in lieu of submitting credits (equal to the lesser of $50 per credit or twice the value of renewable energy credits over the previous year). The RES mandate could be reduced by one-fifth for utilities complying with the Federal Energy Efficiency Resource Standard.
Federal Energy Efficiency Resource Standard (EERS): Natural gas LDCs and electric distribution companies would be required to achieve minimum energy conservation targets. By 2020, cumulative electric savings would have to equal 15% of energy delivered and cumulative natural gas savings would equal 10% of energy delivered. Alternative compliance options include limited trading provisions and default payments.
Performance Standards for New Coal-Fired Power Plants: Coal-fired power plants receiving Clean Air Act permits after January1, 2009 would have to meet a GHG emission standard of 1,100 pounds CO2 per MWh (approximately a 50% capture rate), declining to 800 pounds for plants permitted after January 1, 2020. Plants permitted between 2009 and 2015 would have a deferred deadline for compliance that depends on the commercial availability of carbon capture and sequestration.
Carbon Capture & Sequestration: EPA would be directed to promulgate regulations for certifying and permitting geologic carbon sequestration sites. Utilities would be authorized to hold a referendum on whether to impose ratepayer fees to finance demonstration projects related to CCS. The proposal also authorizes per-ton subsidies of CO2 sequestration, financed by appropriations, to support commercial-scale deployment of CCS technology at industrial facilities and electric generating units.
Fuel Economy and GHG Emission Standards: The Administration would be directed to harmonize California’s vehicle GHG standards with any GHG standards set by EPA as well as Federal fuel economy standards, without preempting the California standards. EPA would also be required to regulate GHG emissions from heavy-duty vehicles, marine vessels, locomotives, and aircraft over the next few years.
Low Carbon Fuel Standard: EPA would be required to gradually reduce the average lifecycle GHG emissions of transportation fuels over the next two decades.
Transmission Planning: The draft provides for FERC to adopt national electricity grid planning principles, and facilitate coordination of regional transmission planning efforts.
New Efficiency Standards: The proposal contains extensive provisions strengthening efficiency standards for commercial and residential buildings; setting efficiency standards for lighting and various appliances; and incentivizing efficient consumer appliances.
It is likely that the Waxman bill will be amended significantly before it is passed by the House. Both the Committee and the House Democratic caucus contain a wide range of opinions on greenhouse gas regulation and representatives from the coal states as well as "blue-dog" conservative democrats, especially from the South, will seek to soften the bill’s provisions. Waxman and Markey are both liberal democrats, from Los Angeles and Massachusetts, respectively, and the bill they have crafted is aggressive.