On 26 June 2009, the United States House of Representatives passed a bill for the American Clean Energy and Security Act of 2009 (Bill) by a vote of 219 to 212. Eight Republicans supported the Bill and 44 Democrats opposed it.

The Bill seeks to reduce emissions of greenhouse gases (GHGs) through a cap-and-trade scheme, and to increase funding and demand for renewable fuels.

In its general outline, the Bill contains features found in bills recently passed in the Australian House of Representatives for a carbon pollution reduction scheme and an expanded renewable energy target.

Key provisions

The key provisions of the Bill are:

  • a ‘renewable electricity standard’ on electricity utilities
  • a series of emissions caps designed to reduce GHG emissions by 17 per cent by 2020 and by 83 per cent by 2050 compared to 2005 levels
  • transitional assistance for energy-intensive trade-exposed industries, and
  • an array of energy-efficiency measures (including ‘smart grid’ measures) for buildings and appliances and for energy efficiency in industry.

Renewable energy standard

The Bill requires electricity utilities, by 2020, to obtain 15 per cent of their electricity from renewable sources and to obtain through efficiency measures a five per cent reduction in the use of electricity. The Bill establishes a Federal Renewable Energy Purchase program which requires the Federal Government to purchase six per cent of its domestic electricity from renewable sources starting in 2012. The Bill contains provisions aimed at facilitating the land use approval processes for the siting of electric transmission lines from wind and solar producers which, typically, are located at a far distance from power users.

Cap-and-trade scheme

The Bill’s cap-and-trade program begins in 2012. It operates by requiring regulated entities—responsible for approximately 85 per cent of the GHG emissions in the United States—to obtain emission allowances for each tonne of GHGs that they directly emit, or that are embedded in the fossil fuels which they process or distribute. The Bill specifies by calendar year the number of emissions allowances which may be issued for that year, and the total number of allowances on issue reduces each year. Application of the cap-and-trade scheme takes effect in stages. Producers and importers of petroleum and coal-based liquid fuels will be subject to the scheme for the carbon content of their fuels beginning in calendar year 2012. Electric utilities will also be subject to the scheme beginning in that calendar year for their combustion of coal and natural gas. Industrial sources (determined by reference to a 25kT CO2e threshold) will be subject to the scheme beginning in calendar year 2014, and local natural gas distributors beginning in calendar year 2016.

Subject to quantitative limits, regulated entities can comply with the cap-and-trade scheme by acquitting ’offsets’. An offset is an emission reduction made by a source other than a regulated entity, and the reduction may be made either domestically or (with some restrictions) internationally. The Bill contains a concept called ‘term offset credits’ which will allow a regulated entity to comply with its obligations under the scheme using offsets from projects that provide short-term, but not permanent, emissions reductions. But ‘term offset credits’ must be replaced by emission allowances or by permanent offset credits before the term offset credits expire, and a regulated entity which proposes to use ‘term offset credits’ will be required to provide security equal to the cost of obtaining those allowances or permanent credits.

A regulated entity which fails to hold emission allowances or ‘offsets’ sufficient to cover its regulated emissions in any particular year will face an ‘excess emissions penalty’ equal to twice the fair market value of the deficiency in emission allowances or ‘offsets’. The Bill will contain ‘make good’ provisions requiring the deficiency to be rectified in the subsequent year. In addition, the Bill will impose an absolute prohibition, again enforceable by penalty (and third party action), against emitting without sufficient emission allowances or ‘offsets’.

Debate over the Bill’s strategy for allocation of emission allowances has been contentious. In the initial phase of the cap-and-trade scheme, approximately 15 per cent of emission allowances will be auctioned. The rest will be allocated by the scheme administrator for a variety of purposes including the following:

  • 35 per cent to the electricity sector: This assistance will decrease over time and will be discontinued between 2026 and 2030
  • 15 per cent to energy-intensive trade-exposed industrial sources: These include the aluminium, steel, glass, pulp and paper, and cement industries. This assistance will decrease over time and will be discontinued by 2025, and
  • two per cent to domestic petroleum refineries: This assistance will decrease over time and will be discontinued by 2026.

The remainder of emission allowances will be allocated to purposes of consumer protection, investment in energy efficiency and clean energy technologies, and other public purposes such as preventing tropical deforestation. Instead of allocating auction revenues to various programs, the Bill grants allowances to those programs and allows their recipients to sell the allowances to support the programs. In this way, the Bill will make an allocation of emission allowances (estimated to be worth US$90 billion) to state-based programs designed to promote renewable energy and energy efficiency, an allocation of (estimated) US$60 billion in allowances for the development of carbon capture and storage (CCS) technologies, and (estimated) US$20 billion in allowances for research and development of electric and other advanced technology vehicles, among other investments. Under this approach to allocation, a significant proportion of emission allowances will be distributed to entities which have no compliance obligations under the cap-and-trade scheme.

Finally, the Bill contains a requirement that all new coal-fired power plants permitted under the United States Clean Air Act after 2020 must achieve specified emissions performance standards which, effectively, make such plants contingent on the success of CCS technology. Coal-fired plants permitted between 2009 and 2019 must achieve that standard by no later than 2025.

Next steps

Attention now shifts to the United States Senate. There, the Energy and Natural Resources Committee has developed its own energy Bill (the American Clean Energy Leadership Act). It remains to be seen whether the Senate will pass comprehensive climate change legislation, confirmable with the Bill, in the northern autumn.