Subtitle A—Reducing Global Warming Pollution

Goals. The Clean Air Act is amended by the addition of a new Title VII, through which economy-wide reductions of GHGs of 5 percent by 2013, 17 percent by 2020, 42 percent by 2030, and 83 percent by 2050 are implemented. New Sections 711–714 identify the six internationally regulated GHGs, establish carbon dioxide equivalencies for these pollutants, implement a more expansive GHG registry program, and suggest best achievable performance standards for industrial gas production.

Program rules. New Section 721 creates tradeable GHG emission allowances—each authorizing the emission of one metric ton of carbon dioxide equivalent—the number of which from 2013 to 2050 corresponds to the overall GHG reduction goals of the bill. In general, the following categories of GHG sources are "covered sources" and are obliged to hold allowances sufficient to authorize GHG emissions: electricity sources; refined product providers; industrial gas producers; NF3 sources; geologic sequestration sites; industrial stationary sources in the manufacturing sector or natural gas processing or transportation sector; industrial fossil-fuel combustion sources; natural gas local distribution companies; and research and development facilities. All electricity sources and refined products sources are obliged to hold allowances, but other sources must hold allowances only if they emit more than 25,000 metric tons per year of CO2e. This threshold may be reduced under Section 721(g) by the EPA to 10,000 metric tons per year. Refiners of petroleum products are subject to a special rule under which they are required to purchase allowances equivalent to the CO2e emitted (without controls) through the combustion of their products. Commencing in 2013, refiners will pay the EPA for non-tradeable allowances each quarter, with the price being set by reference to the most recent auction price for allowances. The emission prohibition is phased in, beginning with electricity sources and refined product providers in general in 2014; for other sources, primarily industrial, they become subject to regulation in 2016. Section 722(c) sets out a detailed list of which sources are subject to which compliance deadline. Under new Section 721(d), sources nationwide may use up to two billion offset credits generated under Sections 731–763 to satisfy their allowance requirements. The use of international offset credits is restricted to 500 million metric tons of CO2e unless domestic offset credits are unavailable, in which case the number of international offset credits that may be used is increased up to one billion.

Trading, banking, and borrowing. Subject to market oversight, new Section 724 authorizes the lawful holder of an emission allowance or offset credit to buy, sell, or hold allowances and credits. Allowances and offset credits may be banked—subject to expiration regulations to be promulgated by the EPA—and used in future years for compliance. Covered sources may also borrow a limited number of allowances without interest from the allowances to which it is entitled in the year immediately following a given compliance year. Borrowing with prepaid interest is allowed for up to 15 percent of allowances needed in a given compliance year from allowances to which it is entitled in years one through five after the compliance year. Section 726 also establishes a cost containment reserve, which may plan an important function in moderating allowance prices.

Domestic and international offset credits. Offsets allow entities not subject to the bill's greenhouse gas emissions cap to sell credits for emission reduction to the regulated industries that may in turn use those credits to comply with their obligations to reduce GHG emissions. The bill mandates that these offset credits "represent additional, measurable, verifiable and enforceable emission reductions" and employs a structure similar to that of other carbon offset programs, with a central agency approving project types and other methodologies and the emission reductions from individual projects being verified by independent third-parties. The specifics of this system will be set forth in regulations to be promulgated by the EPA Administrator, in consultation with an advisory committee, the Departments of Interior, Commerce and the Department of Agriculture. As the agriculture and forestry sector is expected to provide the bulk of available domestic offsets, the Department of Agriculture will serve as the lead agency in setting the requirements for and auditing such projects. Approval of project methodologies, as well as the accreditation and supervision of the independent verifiers will remain with the EPA.

Offsets can come from a variety of emission-reducing activities and the bill stipulates a process for determining which projects are eligible, though the initial list will include: collection of fugitive methane gas from mines, landfills and the oil and gas industry; aforestation of acres not forested as of January 1, 2009; recycling; improved tillage and crop rotation practices; improved fertilizer management; as well as manure management and biogas capture. Offset credits will be logged on a central registry and the bill requires accounting procedures to ensure that all reductions are real and permanent. In order to facilitate the participation of smaller land owners, the bill allows for aggregation of projects by different landowners.

State programs. One of thorniest problems in crafting a federal climate bill is how to treat state and voluntary emission reduction programs, such as the Regional Greenhouse Gas Initiative (RGGI) and the Western Climate Initiative (WCI). The bill contains provisions for "qualified early offset programs" established prior to 2009, which would allow for projects under such a regime to generate offsets, provided certain criteria are met. To qualify, a project must also have commenced after January 1, 2001 and be achieved after January 1, 2004.

International offsets. Both the EPA and the U.S. Agency for International Development will play a role in issuing regulations for issuance of international offsets, and such offsets may only come from developing nations. The credits and their underlying emission reductions, may reflect a nationwide sectoral improvement (provided certain circumstances are met), stem from reduced deforestation or be issued pursuant to a mechanism established by an international body. The last approach would presumptively include the Clean Development Mechanism (CDM) established by the Kyoto Protocol. After 2016, CDM and other international credits will have to meet country-specific analysis of the sectoral approach such as GDP, total emissions of the country, and international competitiveness, which may well foreclose credits from countries such as China.

Subtitle B—Disposition of Allowances

Subtitle B allocates (that is, distributes at no charge) allowances to a number of recipients, with the balance of allowances being made available through an auction process. The number of allocated allowances declines over time. The following are recipients of varying levels of allocated allowances (or allowance auction proceeds): electricity local distribution companies; natural gas local distribution companies; states, for the purpose of reducing the overall propane and heating fuel costs for their residents; disproportionately impacted consumers; other consumers; trade-exposed industries; for purposes of industrial energy efficiency improvement; refiners; clean energy technology development and deployment; adaptation; early action; and transportation infrastructure and efficiency.

Subtitle C—Achieving Fast Mitigation

Subtitle C contains a number of provisions aimed at accelerated reduction of emissions of hydrofluorocarbons, black carbon, and methane. A series of studies and programs are contemplated to continue the process of near-term, effective emission reduction strategies, including enhanced soil sequestration of CO2.

Subtitle D—Ensuring Regulatory Predictability for GHGs

Sections 2301–2307 exempt greenhouse gases from regulation under various provisions of the Clean Air Act, including: (1) the national ambient air quality standards provisions of Section 108 of the Act; (2) the new source performance standards provisions of Section 111 of the Act, provided, however, that existing and uncapped sources may be subject to future regulatory performance standards; (3) the hazardous air pollutant provisions of Section 112 of the Act; (4) international air pollution provisions of Section 115 of the Act; (5) the new source review provisions of Section 169 of the Act; and (6) the operating permit provisions of Title V of the Act.

Subtitle E—Regulation of GHG Markets

CFTC as GHG trading regulator. The bill designates the Commodities Futures Trading Commission (CFTC) as the regulator of all GHG markets, subject to input from the Department of Treasury. The CFTC will exercise authority over greenhouse gas instruments similar to that it exercises over agricultural commodities, including setting position limits, enforcing protections against fraud and market manipulation. All greenhouse gas instruments must be cleared by a CFTC-approved derivatives clearing organization and traded on an exchange operated by a regulated greenhouse gas trading organization, which would also be overseen by the CFTC. The bill empowers the CFTC to ban short selling of greenhouse gas instruments as well as the power, through the trading organizations, to suspend trading completely in the event of a specifically defined market emergency.

Limits on trading. This bill seeks to balance limitations on speculation and market volatility with the need to protect liquidity in the GHG market. Direct or primary trading of allowances themselves is restricted to emitters subject to the cap and "regulated greenhouse gas participants," which may include other participants, such as third party investors, if the CFTC finds that broader participation is required for "a liquid and well-functioning market that would ensure not more than a reasonable rate of economic return."

The bill allows for a wider secondary market consisting of derivative contracts and transactions that do not provide for physical delivery of the greenhouse gas instrument. This sets up the somewhat unusual circumstance where swaps and futures trading may be less regulated and more openly accessible than trading of the underlying, primary instruments. Yet, while there may be a role for a market-maker in the regime envisioned by this bill, it is also clear that the bill attempts to carefully oversee the operations of the organizations that will process and clear primary and secondary trades. Among other things, the CFTC will set requirements and procedures for registration as trading organizations or regulated participants and all instruments based on greenhouse gas allowances. These organizations will be required to report market prices in real-time and provide market participants with impartial access to the market.

Subtitle F—Miscellaneous

Preemption of state cap and trade programs. New section 806 of the Clean Air Act would preempt any state cap and trade program beginning the first calendar year in which allowances are allocated. Other forms of state greenhouse gas regulation that do not employ a cap and trade structure—such as vehicle fleet or fuel standards—are expressly excluded from the preemption provision.

Forestry sector greenhouse gas accounting. New section 807 of the Clean Air Act would require the EPA, in consultation with the Department of Interior and the Department of Agriculture, to perform an annual accounting of sequestration and emissions of greenhouse gases from forests and forest products, and woody biomass on non-forest land.

Renewable biomass studies. New section 808 of the Clean Air Act requires the EPA, in consultation with the Department of Interior and the Department of Agriculture, to perform a study every five years on the impact of the Act's cap and trade provisions on the use of renewable biomass and liquid fuels derived from liquid biomass. The studies will focus on effects that the use of renewable biomass will have on greenhouse gas emissions and other environmental outcomes. Additionally, section 808 directs the Department of Agriculture to conduct a study every five years on the effects of the Act's cap and trade provisions on food production, the cost of food, and the impact on agricultural industries.

Definition of renewable biomass. New section 809 of the Clean Air Act requires the EPA and the Department of Agriculture to enter an arrangement with the National Academy of Sciences to conduct a study evaluating how sources of renewable biomass contribute to the goals of energy independence, environmental protection and greenhouse gas reduction. After reviewing the report, the EPA and the Department of Agriculture must submit recommendations to Congress concerning the non-federal land portion of the definition of renewable biomass in section 700 of the Clean Air Act. Along similar lines, the Departments of Interior and Agriculture are required to conduct a joint scientific review regarding renewable biomass on federal land and to submit recommendations to Congress concerning the federal lands portion of the definition of renewable biomass in section 700.

Private enforcement. Section 2502 of the Act allows any person to petition for review of EPA action. However, the provision also expressly allows reviewing courts to remand the EPA's action without vacatur if doing so would impair or delay protection of the environment or public health, or otherwise undermine the timely achievement of the purposes of the Act.