For the first time, legislation aimed at curbing greenhouse gas (GHG) emissions has passed a house of Congress. On June 26, the House of Representatives approved the American Clean Energy and Security (ACES) Act by a vote of 219 to 212, with eight Republicans voting in favor and 44 Democrats opposing.1 The debate now moves to the Senate, which has already begun assembling its own version of climate legislation.

The 1,400-plus page bill has two primary components. First, it establishes an annual limit on the amount of GHGs that can be emitted in the U.S. by requiring large industrial sources of GHGs to acquire government-issued “allowances” for every ton that they emit (cap-and-trade). Second, it encourages the development of carbon-free energy sources and improved energy efficiency throughout the economy through a number of interrelated programs. If enacted into law, ACES is likely to transform the electricity generation, heavy industry, construction and agricultural sectors, as well as indirectly impact how all companies and individuals purchase and use energy.

The key elements of the bill are:

  • A mandatory 17 percent reduction in United States GHG emissions below 2005 levels by 2020 and an 83 percent cut by 2050 (the carbon cap).
  • A requirement that most large generators of GHGs and producers of liquid fossil fuels hold allowances for every ton of GHGs they emit or cause to be emitted. These allowances can be resold and traded on the open market.
  • A first-year free distribution of most of the 4.6 billion emissions allowances (intended to counteract the impact of increased energy prices on consumers), with the rest of the allowances sold in a nationwide auction.
  • A nationwide “renewable energy portfolio” that requires electric utilities to generate at least 15 percent of their energy from renewable sources by 2020.
  • New standards for building efficiency that require new construction to be 50 percent more efficient by 2015.
  • Investments in energy efficiency, clean technology, domestic and international climate adaptation and green job training.

Cap and Trade Program

The primary means by which ACES is intended to reduce GHG emissions is the establishment of a nationwide “cap-and-trade” system, which is intended to create market incentives for companies to reduce their annual GHG emissions. Starting in 2012, major emitters of GHGs — primarily electric utilities, oil refiners and companies above a certain emissions threshold — will need to obtain an “allowance” for each ton of carbon dioxide (or its equivalent) it emits directly into the air through the combustion of fossil fuels.2 The total number of allowances distributed each calendar year is “capped,” and the number distributed declines each year through 2050, when the cap is less than 20 percent of the 2012 distribution. In 2012, the USEPA will issue 4.6 billion allowances worth over $70 billion based on the Congressional Budget Office’s initial estimated market value of $15 per allowance. The total number of allowances will fall each year and it is predicted that the market value for each allowance will rise.

Initially, 85 percent of the allowances will be given away, primarily to electricity producers, oil refiners, natural gas distributors and certain heavy industries. The rest of the allowances will be auctioned quarterly on the open market. With each passing year, more allowances will be auctioned and fewer will be given away.

These allowances are intended to be tradable commodities. If a company needs more allowances to cover all of its emissions for a given year, it can attempt to purchase them in the quarterly auction or offer to buy them from another entity. With some narrow exceptions, every allowance for a given year may be either “used” through the emission of GHGs in that year, “banked” for use in a future year, traded to another entity or voluntarily “retired” without any emissions taking place. As an alternative to buying more allowances or reducing its own GHG emissions, a company can “offset” a certain percentage of its emissions by funding projects in other parts of the country or overseas that create permanent reductions in GHG emissions.

Companies that emit more GHGs than allowances held will be penalized twice the market value of the allowances they failed to hold. Moreover, ACES requires the SEC to regulate the market for emissions allowances and makes it a federal crime to engage in fraud, market manipulation and excess speculation.

Who Needs Allowances?

Under ACES, only certain entities are “covered” and therefore required to hold allowances for each ton of CO2 they emit. In some instances, the CO2 emission is regulated “upstream” (at the point of the fuel’s production, for example), while in other instances it is regulated “downstream” (at the point of the fuel’s actual combustion). Each ton of resulting CO2 emission, whether it is regulated upstream or downstream, requires that only one allowance be held. As a result, companies (generally) do not need to hold any allowances for electricity purchased from a third party or emissions resulting from the life-cycle of their products.

The primary covered entities are:

  • Fossil fuel-fired generation of electricity for sale, including all electric utilities and unregulated vendors of electricity (downstream).
  • All producers, importer and distributors of liquid petroleum (including home heating oil and propane), liquid coal, petroleum coke and natural gas by-products (upstream).
  • Stationary sources (newly defined to include the operations comprising any plant, building, structure or stationary equipment, including support buildings and equipment) that emit more than 25,000 tons of CO2-equivalent (downstream).
  • Manufacturers in specific industries—including makers of aluminum, cement and ammonia – regardless of the quantity of their GHG emissions (downstream).
  • Natural gas local distribution companies (LDCs) are regulated for the emissions of their customers that are not regulated downstream. LDCs are not regulated for the emissions resulting from their customers that are regulated entities (partially upstream and partially downstream).

Roughly speaking, if an industrial source uses more than 460 million standard cubic feet (4.6 million CCF) of natural gas or more than 8,000 tons of coal per year, it is likely to emit more than 25,000 tons of CO2. Companies that are required to hold allowances must also monitor and report their GHG emissions to the EPA every year. Therefore, companies that directly emit a substantial quantity of GHGs ought to preemptively calculate their emissions in order to determine whether they are presently, or could become, subject to the cap-and-trade regime.

Covered under a separate and distinct cap-and-trade regime are producers of hydrofluorocarbons (HFCs), which are primarily used as coolants, and, to a much lesser extent, in medical devices.

Who Gets Free Allowances?

Initially, most of the allowances are distributed free to two groups: (1) covered entities, to fulfill their statutory obligations; and (2) groups performing various climate change-related activities, with the expectation that they will sell the allowances to covered entities and use the proceeds to fund their programs. The initial allocation in 2012 is as follows:

Click here for table.

Over half of the free allowances are initially given directly to electrical utilities and natural gas companies, although natural gas companies would not be subject to cap-and-trade until 2016. The allowances are allocated to electric utilities in two different ways. Half of the allowances are distributed pro rata based on the average annual CO2 emissions attributable to generation, while the other half are distributed pro rata based on amount of electricity delivered. The initial 2012 distribution for each company is calculated based on average emissions and electricity delivered during a consecutive three-year period of the utility’s choice between 1999 and 2008.4 Starting in 2016, natural gas companies will need to obtain allowances for anticipated GHG emissions from the combustion of all natural gas delivered to non-regulated customers.

ACES includes provisions to ensure that the value of the free allowances to electricity generators and natural gas companies is passed through to ratepayers in the form of consumer rebates. Utilities and natural gas companies are also barred from increasing rates on industrial customers who are themselves subject to cap-and-trade.

A large number of allowances are also allocated for “trade-vulnerable, energy-intensive industries” such as aluminum, steel, glass and paper/pulp manufacturers. It is unclear from the bill how allowances will be apportioned among these companies, though it will presumably be based on a company’s historic GHG emissions. Oil refineries are also entitled to free allowances beginning in 2014.

The remaining allowances are allocated to states and federal agencies and as private grants, so that they may be sold on the open market to fund certain climate change-related programs:

  • State energy efficiency programs;
  • Federal and state-funded energy research and development;
  • Carbon capture and sequestration technology;
  • Clean vehicle technology through grants to auto manufacturers;
  • Agricultural practices that reduce or offset GHG emissions; and
  • Domestic and international climate change adaptation.

Finally, the ACES cap-and-trade program permits the exchange of carbon allowances from pre-existing state programs such as RGGI and the Western Climate Initiative, and compensates covered entities that have documented reductions in GHG emissions between 2001 and 2008.

Offsets

Offsets are emissions allowances that are created by funding a project – such as reforestation — a which reduces atmospheric GHG levels. Under ACES, companies can purchase offsets to meet a portion of their allowance obligation. The bill puts certain restrictions on the use of offsets, however. First, the EPA is charged with establishing detailed regulations outlining what types of projects may be credited and what methodologies may be used to create the project and calculate the emissions reductions.

Second, starting in 2017, companies will be required to reduce an extra ton of GHG emissions for every four tons of CO2-equivalent that it emits because it purchased offsets.

Clean Energy Deployment

ACES establishes a number of additional programs to reduce GHG emissions, including:

  • Imposition of a national renewable energy standard which requires utilities to generate 20 percent of their electricity from renewable sources by 2020. Renewable sources include wind, solar, geothermal, biomass, tidal wave, and certain types of waste-to-energy and hydroelectric.
  • Funding for the development of commercial-scale carbon capture and sequestration (CCS) from stationary sources.
  • Development of infrastructure to support large-scale deployment of plug-in electric vehicles, as well as direct financial assistance and incentive loans to manufacturers of electric vehicles.
  • Establishment of State Energy and Environment Development (SEED) Funds to manage emissions allowances given to states for investment in energy efficiency and renewables.
  • Deployment of “smart grid” technologies designed to reduce peak electricity demand and to improve national electricity transmission.

Green Building and Energy Efficiency

ACES contains several sweeping energy efficiency provisions which will dramatically impact the construction industry and land use policy. (For more analysis of this portion of the bill, see http://www.njlandlaw.com/.)

First and foremost, ACES requires the Department of Energy to establish a national building code for new residential and commercial construction that reduces building energy consumption by 50 percent by 2014 (residential) and 2015 (commercial). Within one year of the establishment of a national building code, each state must certify that it has adopted the national code, updated its own codes to meet or exceed the national target or gotten local governments representing at least 80 percent of the state’s urban population to upgrade their codes.

Within two years of adopting new building codes, states and local governments must demonstrate compliance by certifying that 90 percent or more of new and substantially renovated building space from the preceding year meets the code. States will be granted exemptions within the first seven years if they demonstrate that they have been making “significant progress” towards compliance.

ACES also directs the DOE to develop a program that will create national standards for retrofitting existing commercial and residential buildings. These new codes are likely to dramatically expand the demand for green building materials and services, and may advantage developers and contractors operating in jurisdictions that have already adopted mandatory green building requirements.

ACES also amends the Energy Policy and Conservation Act of 2005 to impose tougher energy-efficiency standards on lighting and appliances and encourage deployment of higher-efficiency products in the marketplace. The EPA is also directed to investigate the feasibility of developing a voluntary national product carbon disclosure program that would encourage all product labels to disclose their carbon footprint through a lifecycle analysis.

Finally, a last-minute amendment to the bill, the Green Resources for Energy Efficient Neighborhoods Act of 2009 (GREEN ACT) provides a variety of incentives to lenders and financial institutions to provide lower interest loans and other benefits to consumers who build, buy or remodel their homes and businesses to improve their energy efficiency and use alternative energy.

Other Provisions

ACES also contains a smorgasbord of new programs and revisions to existing standards, including:

  • Development of an interagency National Climate Service within the National Oceanic and Atmospheric Administration (NOAA) to coordinate the study of and response to climate change.
  • Grants to states and Indian tribes and aid to developing countries for climate change adaptation.
  • State and federal grants to train workers in “green” professions.
  • New GHG emission standards for heavy trucks and aircraft engines under the Clean Air Act.
  • A new requirement that states and metropolitan planning organizations submit GHG reduction plans to the Department of Transportation, detailing efforts to improve public transit, land use regulations and other “green” planning measures.
  • A new EPA program for encouraging GHG reductions from cars, trucks and other mobile sources.
  • New programs to incentivize the development and implementation of more efficient electric motors.

Where Does the Bill Go From Here?

Now that ACES has been passed by the House, the Senate is wasting little time in beginning to develop its own version of the legislation. As of mid-July, Senate leadership has established an October deadline for a Senate floor vote. Along the way, the bill must be drafted, marked up and approved by the Senate Environment and Public Works (EPW) Committee. The Senate bill is expected to differ markedly from ACES, although Senator Barbara Boxer, Chair of the Senate EPW Committee, has suggested that she will be using ACES as the jumping-off point for the Senate version.

In order for Democrats to muster the 60 votes necessary to bring a climate bill to a full vote, they may need to make further concessions to as many as a dozen moderate members of both parties. This could include an even greater role for agricultural interests than in the present bill, as well as a new title relating to nuclear energy. Regardless of what compromises are made, the bill is almost certain to face stiff opposition from most Republicans who believe that cap-and-trade is not necessary and constitutes a “stealth” energy tax. Meanwhile, some environmental groups contend that ACES does not go far enough in cutting GHG emissions and are lobbying Senators for a version stronger than the House bill, and Senate Democrats have declared that they wish to see more funding for mass transit.

If and when the Senate passes its own version, it will then go to a conference committee that will harmonize the two bills. If the conference bill passes both houses, it will then be sent to President Barack Obama’s desk. President Obama’s stated goal is to have a law in place by the time the U.S. delegation arrives in Copenhagen, Denmark in December 2009 for negotiations over a new international climate treaty to replace the 1997 Kyoto Accords. Despite strenuous opposition from some corners, ACES has garnered support from most environmental groups and a substantial segment of the business community. Many observers believe something similar to the current bill stands a reasonable probability of becoming law by mid-December 2009.

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