On May 13, 2010, Senators John Kerry and Joe Lieberman formally introduced their comprehensive climate change and energy bill, the American Power Act (APA). This legislation represents months of work between the lead sponsors and their outreach to various interest groups.

Summary of the American Power Act

Title I: Domestic Clean Energy Development

This section has provisions for encouraging new nuclear power generation, increased offshore oil and gas exploration, deployment of carbon capture and sequestration for coal-fired power plants, renewable energy, energy efficiency and cleaner transportation through electrification. In the wake of the Deepwater Horizon accident, Senators Kerry and Lieberman decided not to drop the increasing offshore drilling provisions with revenue-sharing, although new drilling would not occur until after the investigation into the accident is complete. Part of the revenue is directed to fund state and Federal Land and Water Conservation Funds, while granting a portion to the home state as well. Furthermore, states are authorized to enact laws to prohibit leasing within 75 miles of their coastline.

Title II: Global Warming Pollution Reduction

This section modifies the Clean Air Act to incorporate a cap-and-trade mechanism in which two-thirds of the revenues raised from auctions are paid back to electricity ratepayers in the form of refunds. Like the House's American Clean Energy and Security Act (ACES) counterpart, APA sets goals of reducing domestic greenhouse gas emissions (GHGs) 17 percent in 2020 and 83 percent in 2050, plus freely allocates allowances to existing polluting entities and those which have taken early action, both domestically and internationally. Because this legislation explicitly pre-empts state and regional GHG mitigation programs, allocations are also given to states and regions already participating in such regimes. Furthermore, APA pre-empts specific portions of the Clean Air Act, removing EPA's authority to regulate GHGs from sources covered under the legislation. It ensures GHGs are not considered criteria air pollutants or hazardous air pollutants under the Clean Air Act. Trading of emissions allowances is regulated by the Commodity Futures Trading Commission, and only entities covered by the declining cap may participate in auctions.

Title III: Consumer Protection

This section outlines a number of provisions meant to provide protection to consumers from possible energy price increases. Through 2029, allowances are given to local electric distribution companies and natural gas local distribution companies to benefit retail ratepayers for price increases as a result of legislation. Low-income individuals will receive additional help through a dedicated portion of the auction revenues.

Title IV: Job Protection and Growth

APA incorporates emission allowance rebate programs for industrial sectors to compensate for costs incurred under the bill. The proposal also sets U.S. foreign policy to work on an international emissions reduction program through the United Nations Framework Convention on Climate Change, which has another meeting in Mexico during December 2010. Title IV also includes funding for clean energy career development and investments in clean vehicles powered by compressed or liquefied natural gas.

Title V: International Climate Change Activities

A newly created Strategic Interagency Board on International Climate Investment will evaluate the U.S.'s contributions to financing international climate change activities, including reduced deforestation and adaptation programs.

Title VI: Community Protection from Global Warming Impacts

State and federal agencies will create comprehensive climate change adaptation plans with a particular focus on protecting natural resources, including water management, fire protection and coastal watersheds. Existing programs monitoring biological trends in nature are directed to focus on wildlife responses to changing climate.

Title VII: Budgetary Effects

Statutory PAY-GO applies to APA.

Major Issues for Debate

Pre-emption. APA limits EPA authority to use the existing Clean Air Act to further regulate GHGs in addition to the cap-and-trade mechanism. It also pre-empts regional and state emissions trading systems, which could threaten the support of states already engaged in climate change mitigation programs, although the legislation compensates them for their costs. Associations of clean air agencies and officials have said their support for the bill hinges on their ability to further reduce GHG emissions past national goals. On the flip side, Republican Senator George Voinovich has floated significantly stronger pre-emption language that prevents all climate change regulations through the Clean Air Act, Clean Water Act, Endangered Species Act and more.

Coal Targets and Timelines. The legislation provides $2 billion a year in carbon capture and sequestration (CCS) technology assistance. Like the House bill, APA incorporates additional performance standards on coal-fired power plants in 2020 for all permitted plants since 2009.

Agricultural Exemption. Agricultural interests are not directly included in the cap-and-trade program but have the opportunity to benefit from the bill through offsets programs.

Jobs Leakage. Manufacturing interests advocated for a 10-year delay to include them under a cap-and-trade mechanism. The draft legislation gives them a six-year period in which allowances are freely allocated to manufacturing entities to offset increased costs. The bill also incorporates a border tariff to adjust the price of goods coming from countries that do not have binding emissions reduction targets. With recent polls indicating that "jobs" and "economy" are the first and second most-important issues of voters, look for these provisions to be given particular consideration.

Price Collar. The legislative proposal sets a price floor at $12 and ceiling at $25, to increase each year over the inflation index. The House bill did not include such a collar but did have similar reserve allowances to offset price spikes. Whether or not to include such price collars and at what price will be subject to heated debate.

Transportation. Transportation fuel providers are required to participate in the declining cap, but rather than bid in an auction for allowances, their price will be fixed. In addition, the program transfers some funds to the Highway Trust Fund.

Likely Prospects and Timeline of Events

The Role of the Moderates. In order to reach the 60-vote threshold, the sponsors of the legislation will have to appeal to a large block of moderates in both parties without alienating their political base. Just one of the many issues requiring a delicate balancing will be the offshore drilling language with several moderates demanding its inclusive and almost as many members demanding that the language be dropped.

Timing. At this point, the sponsors have requested that EPA and EIA model their proposal, which could take between 4-8 weeks. Majority Leader Reid has stated that he would like to make a decision around Memorial Day on whether or not to proceed with climate legislation on the Senate floor, or some variation of an energy only bill. The largest impediment to action this year is the shortened legislative calendar and the upcoming midterm elections.

Energy-Only Legislation. Moderate Democrats such as Byron Dorgan and Energy & Natural Resources Committee Chairman Jeff Bingaman have voiced their preference to consider an energy-only bill similar to the one passed out of the Senate Energy Committee with bipartisan support last year. If Senator Reid determines there is not enough support to move forward on the American Power Act, it is likely that he will move the Bingaman energy bill with a climate provision to be considered as an amendment. Expect a push from Energy & Natural Resources Committee members to push for the inclusion of their work.