The U.S. Congress is now the center of climate change policy in the United States, but the passage of legislation for President Obama’s signature would not mark the end of the debate. The American Clean Energy and Security Act of 2009, as passed by the House on June 26, establishes only a broad framework for the reduction of greenhouse gas emissions. Essential details are delegated to the Environmental Protection Agency, the Department of Energy, the Department of Agriculture, the Federal Energy Regulatory Commission and the Commodities Futures Trading Commission for rulemaking.
As a result, long after the ink from the president’s signature is dry, the EPA and other agencies will be busy crafting critical components of the bill’s programs that will determine — perhaps to a far greater extent than the legislation itself — both the obligations imposed on industry and the outcome for the environment. In other words, it will be up to the regulator in many instances to decide who wins and who loses. As it now stands, the bill contemplates no fewer than 22 agency rulemakings or major actions within the first year following enactment. An additional 20 rulemakings or actions are required within two years, and at least another 30 by 2020.
If history is any guide, few of these rulemakings will be completed on time. For example, many of the rulemakings arising out of the Clean Air Act Amendments of 1990 took most of the 1990s to complete, and some key issues remain unresolved to this day.
With the first compliance deadline for emitters of greenhouse gases slated for April 1, 2013, questions loom as to whether the EPA and other agencies will be able to finalize critical regulations far enough in advance for the U.S. carbon market to get off the ground. At best, it appears that a skeleton version of a cap-and-trade system could commence operation on time, but without key features designed to reduce compliance costs and provide regulatory certainty. At worst, regulatory gridlock could ensue, deterring investments in clean technology and disrupting efforts to reduce emissions.
As an example, the bill provides for the distribution of “compensatory allowances” to covered entities that engage in certain types of “non-emissive” uses of greenhouse gases. The objective is to compensate businesses that, under the bill, would be forced to hold emission allowances for activities that do not result in emissions, such as the use of petroleum-based fuel as a feedstock. The bill calls for regulations providing for the creation and distribution of compensatory allowances within two years following enactment. But as noted above, this is just one of more than 40 rulemakings or major agency actions required in that time period.
Covered entities eligible for compensatory allowances could face dramatically different compliance costs if such allowances were not available. This not only creates uncertainty, but it skews compliance costs and foils the kind of long-term planning and investment conducive to the development of new, climate-friendly technologies, products and processes.
The situation is similar with respect to the offsets program established by the bill, but with far greater implications, as offsets arguably represent the only substantial cost containment mechanism in the entire bill. Despite providing a substantial amount of detail, the bill leaves some critical components of the offsets program to the EPA and the Department of Agriculture. For example, the bill does not provide a list of eligible offset project types, instead requiring the EPA and USDA to develop lists within one year of enactment.
Once those are developed, the EPA and USDA would then need to develop and finalize project methodologies — complex, technical procedural requirements for an emission reduction project to be eligible to receive offset credits. The need to complete this process in two years raises concerns over when offset projects could begin generating offset credits, especially given that developing new offset projects could take years once the rules are finalized.
This tight timeframe becomes of even greater concern given the number of offset credits the EPA and USDA would need to issue each year to maximize the bill’s cost containment features. Existing offset programs such as the Clean Development Mechanism and various voluntary carbon market programs have never come close to issuing two billion credits over their entire multiyear lifetimes. Under the bill, the EPA and USDA would be expected to issue two billion offset credits each year. How many of those two billion would be available before the first compliance deadline in 2013 is an unanswered question.
Compensatory allowances and the offsets program are just two examples of key features that will depend heavily on agency rulemaking processes that historically have been anything but expeditious. Legal challenges to agency rulemaking, which figured prominently in the rulemakings following the Clean Air Act Amendments of 1990, could add further delay to the full implementation of many of the bill’s most important provisions.
Equally, if not more, significant than the timing of agency rulemakings is the extraordinary discretion the bill grants to the EPA and other agencies to alter components of the capand- trade system.
Under the offsets provisions, for example, the EPA and USDA are required to revise key features of the program every five years as part of a periodic review. This authority is purportedly to ensure the environmental integrity and efficient operation of the cap-and-trade system. While these are important goals, the unchecked nature of this authority could frustrate project developers and covered entities seeking to participate in the carbon market. Most emission reduction projects take a year or more to develop and then can operate for a decade or longer.
The risk that projects could lose their eligibility to generate offset credits, potentially with little notice, as a result of an EPA or USDA review could discourage investment in projects and hinder the emergence of a robust offset credit market.
More broadly, even features of the cap-and-trade system seemingly carved in stone are subject to change. No more obvious example exists than the number of emission allowances the bill requires the EPA to establish for each year of the program. The precise numbers are listed in a table embedded in the text of the bill, but the EPA is authorized to change these numbers if, among other things, it determines that the underlying emissions data on which these numbers are based is inaccurate.
The EPA may make such a change only once, but even a one-time change would affect the number of allowances allocated to covered entities, states, federal agencies and other groups. This in turn fosters uncertainty, raises compliance costs and could potentially destabilize the carbon market.
There also are instances in which the bill delegates authority for key changes to entities outside the Executive Branch. For example, the bill requires the EPA to report to Congress on U.S. and foreign efforts to reduce emissions and to recommend additional actions to address climate change. The bill then requires the National Academy of Sciences — a private entity whose members are not appointed by the president — to review the report and issue its own recommendations. The president is then required to order agencies to use all existing authority to implement these recommendations and submit a report to Congress requesting additional legislative action where needed.
Although these provisions do grant the National Academy and the president a limited amount of discretion, they nevertheless raise potential constitutional issues, as they effectively allow an entity that is untethered to the democratic process to tie the president’s hands and force potentially unpalatable action.
In the end, what all this means is that as a comprehensive climate change regulatory regime inches closer to reality, its enactment will mark only the beginning of the jockeying between possible winners and losers in the new U.S. carbon markets.