introduction

The U.S. House of Representatives recently passed The American Clean Energy and Security Act (the “Act”), also referred to as the Waxman-Markey Bill, indicating the U.S. government’s commitment to creating a greenhouse gas cap and trade system.1 The Act passed by a vote of 219-212 on June 26, 2009.2

A previous version of the bill (the “Introduced Bill”) was introduced to the House on May 15, and an initial discussion Draft (the “Draft”) was released on March 31. Both of these versions underwent revisions before the vote in June.

The Act is subdivided into five titles: (1) Clean energy – which includes the Combined Efficiency and Renewable Electricity Standard and Carbon Capture and Sequestration; (2) Energy Efficiency; (3) Reducing Global Warming Pollution; (4) Transitioning to a Clean Energy Economy; and (5) Agriculture and Forestry Related Offsets.3 The fifth title is not present in the Draft or Introduced Bill.

the American Clean Energy and Security Act of 2009

The Act creates a nation-wide cap and trade system as well as other energy saving and renewable energy programs. It provides for:

  1. Clean energy - by setting standards for energy generation, especially clean energy generation, including the capturing and storing of carbon and the creation of a smart grid;
  2. Energy efficiency programs, including the establishment of building codes and energy efficient products;
  3. A cap and trade system affecting 87% of greenhouse gas emissions in the USA; and
  4. Financial assistance during the transition period for sectors especially affected by the Act.4

renewable energy

Under the Act, electricity producers selling at least 4 million megawatt hours of energy will need to generate renewable energy or purchase renewable energy credits equal to certain percentages for each year.5 These percentages begin at 6% for 2012 and increase up to 20% for the years 2020 to 2039.6

emission reductions

The Act establishes a greenhouse gas emissions cap that will reduce greenhouse gas emissions to specified levels. These are 3% below 2005 levels by 2012, 17% below 2005 levels by 2020, 42% below 2005 levels by 2030, and 83% below 2005 levels by 2050.7

emission allowances

The Act provides emission allowances for groups financially impacted by the new energy saving programs and cap-and-trade system. These groups include energy consumers and businesses that use clean energy.8 The allowances will also aid in the development of new technology and will directly benefit communities that are actively reducing climate change.9 According to the Act, allowances to electricity and gas companies must directly benefit consumers.10 Initially, about 20% of allowances will be auctioned.11

In addition to these groups, other energy-using sectors, such as businesses involved in trade, coal generation, and oil will have access to allowances.12 Allowances will also be used for advanced vehicle technology and for renewable energy and energy efficiency programs.13

offsets

Up to 2 billion metric tons of greenhouse gases will be offset every year, with half of this amount offset through activities in the US and half internationally.14 This division between domestic and international offsets may be adjusted, depending on availability of domestic offsets.15 The maximum permitted adjustment is equal to 1.5 billion metric tons from international offsets per year.

changes from the draft and Introduced Bill to the Act

A number of changes were made to the Draft, and then to the Introduced Bill before it passed on June 26th. As compared to the Draft, the Act would “likely result in lower allowance prices, a smaller impact on energy bills, and a smaller impact on household consumptions.”16

These changes include the following:

  • The most significant change from the Draft and Introduced Bill to the Act is the reduction of the 2020 emissions cap from 20% to 17% below 2005 levels. This is expected to lower allowance prices by 3%, and thus lower household energy bills relative to the Draft and Introduced Bill.17
  • There are also changes to the Draft with regards to offset provisions. These changes should increase the use of offsets, lowering the cost of the program.18 The Act and the Introduced Bill state that one ton of offsets needs to be purchased for one ton of emissions, and not five tons of offsets for four tons of emissions as provided for in the Draft, a change that increases domestic offset use and decreases domestic offset prices.19 With regards to international offsets, the Act and the Introduced Bill allow one ton of offsets per one ton of emissions but only for the first five years of the program.20 After this period of time, entities will need to purchase five tons of international offsets per four tons of emissions. The one-to-one ratio will result in a decrease of 7% in allowance prices per year.21
  • An additional amount of international offsets may be allowed under the Act and Introduced Bill, and not under the Draft, potentially resulting in even lower allowance prices.22 This additional amount will be equal to at most 1.5 billion tons of international offsets, instead of 1 billion tons, and will be adjusted by the Administrator as required.23
  • The Act has revised provisions regarding incentives for carbon capture and sequestration (“CCS”), changes that will likely result in more CCS as well as higher coal use.24 Originally, the Draft provided for the first 3 Giga Watts (“GW”) of CCS to receive $90 per ton captured for 10 years, and the next 3 GW to receive $70 per ton for 10 years, and for any significant additional CCS to receive a bonus of $50 per ton for 10 years.25 The Introduced Bill and Act have larger subsidies, since up to 10 GW of CCS is eligible for $90 per ton captured for 10 years and since a reverse auction will provide additional allowances of $50 per ton for 10 years.26 This is equal to 44% more CCS than that made available by the Draft.27
  • While the Draft has a section for a “low carbon fuel standard,” neither the Introduced Bill nor the Act have this section. Instead, the Introduced Bill and Act provide for various clean transportation measures. Both the Introduced Bill and Act have a standard for “refineries to reduce the annual life cycle carbon emissions from their fuels.” 28
  • While the Draft provides for unlimited banking of allowances and a one-year limit on the borrowing of allowances, the Act and Introduced Bill allow for one-year borrowing as well as borrowing for 2-5 years.29 Further, unlimited next-year borrowing is permitted under both the Act and Introduced Bill.30 The unlimited banking provisions remain the same.31 All three versions provide for a strategic reserve.
  • While the Act continues to require retail electricity suppliers to meet 6% of their demand through renewable energy by 2012, the percentages for subsequent years differ from those of the Draft.32 According to the Act, the requirement is 9.5% in 2014, while in the Draft it is 8.5%.33 By 2021, the requirement under the Act is 20%, while in the Draft it is 17.5%.34 Through 2039, the requirement under the Act is 20%, while in the Draft it is 25%.35 These percentages are the same in the Introduced Bill and in the Act. Further, in the Draft, retail electric suppliers selling one million megawatt hours of electricity or more are subject to the above percentages.36 Under the Act and the Introduced Bill, only those selling four million or more are subject to them.37
  • The Act has an additional requirement for India and China to adopt greenhouse gas emission standards at least as strict as those under the Act. If India and China are not compliant, the Administrator may release a determination to the media. This requirement is not present in either the Draft or the Introduced Bill.
  • Additional provisions are present in the Act for advanced technology vehicle manufacturing incentive loans, an open fuel standard, a temporary vehicle trade-in program, and loan guarantees for constructing renewable fuel pipelines.
  • Additional provisions are present in the Act for creating the Cash for Clunkers Temporary Vehicle Trade-in Program.
  • Additional provisions are present in the Act for Nuclear and Advanced Technologies. This includes a provision for a clean energy investment fund.
  • Additional provisions are present in the Act for Building Energy Efficiency Programs, including tree planting programs and energy efficiency for data center buildings.
  • There are provisions in the Act establishing a WaterSense program that will promote water-efficient products, buildings, services and landscapes.

next steps

The Act may become law as early as the end of 2009.38 An important indication that the Act is likely to become law is a U.S. commitment to an international climate change agreement in Copenhagen in December 2009.39 The Act is likely to undergo further revisions in the Senate before becoming law.40