“For even as we celebrate tonight, we know the challenges that tomorrow will bring are the greatest of our lifetime — two wars, a planet in peril, the worst financial crisis in a century.”

-President-elect Barack Obama, 4 November 2008

The United States is responsible for almost a third of the globe’s cumulative energy-related greenhouse gas emissions (“GHGs”).1 Not only has President-elect Obama promised to take meaningful action to reduce emissions through a cap-and-trade program, he has promised to return his country to the international negotiating table in earnest. Also this fall, House Representatives John Dingell and Rick Boucher circulated draft legislation proposing a cap-and-trade program that would cause long-term emissions reductions similar to those anticipated by the President-elect. The law would take effect through amendments to the Clean Air Act.

The current Canadian federal government has seized upon the US election to further its earlier promises to engage the US in the development of a North American trading system. The day following Obama’s election, it called for a North American cap-and-trade program.2 Such a continental program would, among other benefits, reduce leakage. On November 19, 2008, in the aftermath of Canada’s federal election, Governor-General delivered the Speech from the Throne, reiterating a commitment to reduce emissions by twenty percent by 2020.3

President-elect Obama’s plan

President-elect Obama has committed to reducing carbon emissions to 1990 levels by 2020, and to 80% below 1990 levels by 2050.4 He has also committed to an economy-wide, absolute reduction, cap-and-trade program. Under such a program, 100% of allowances will be auctioned from the program’s inception. Some of the revenue generated will be used for the development of clean energy and energy cost relief to low-income Americans. President-elect Obama has also committed to re-engaging with the United Nations Framework Convention on Climate Change (UNFCCC). 5 While offsets will be permitted, their scope and extent has yet to be determined.6 President-elect Obama also has plans for a number of policies that would complement the cap-and-trade program, including a national low carbon fuel standard.

Pursuant to the Massachusetts v. EPA decision7, the Environmental Protection Agency (“EPA”) has the authority to regulate GHGs under the Clean Air Act. Notwithstanding the authority of the executive branch, House Representative Dingell and many other members of Congress prefer a legislative course of action. The President-elect has stated that he will start the EPA rulemaking process if insufficient congressional action is taken within eighteen months and that his “Green Recovery” plan is his first priority.8 A group of seventy legislators from across the Americas recently endorsed the President-elect’s plan.9

The Draft Dingell-Boucher Bill

Scope

The Dingell-Boucher bill (the “Bill”) would cap emissions of the following types of entities: electricity generators; producers and importers of petroleum or coal-based liquid fuels that combust to cause the emission of more than 25,000 tons annually; direct producers and importers of GHGs; industrial facilities in specified sectors; natural gas distribution companies; and geological sequestration sites.10

Such sectoral scope would cover approximately 88% of GHG emissions. The Bill encourages the EPA to regulate emissions from other sources according to industry standards. Certain coal-fired power plants would be required to sequester 60% of their CO2 emissions by 2025.11 Importers of carbon-intensive goods from countries that have not taken action on climate change would need to surrender “international reserve allowances.” A new International Climate Change Commission would be responsible for determining which of the United States’ trading partners would be levied with penalties for having taken insufficient action on climate change.12

The Bill caps emissions at 80% below 2005 levels by 2050. Interim steps would include reducing emissions to six percent below 2005 levels by 2020, and 44% below 2005 levels by 2030.13 Under the Bill, auditing and verification would be the responsibility of the EPA administrator. The Bill does not address third party verification.

Compliance Options

Entities would be allowed to meet their obligations through a number of options. In terms of allowance allocation, the Bill proposes four alternatives involving varying degrees of auctioning. All four options would involve full allowance auction by 2025, with proceeds flowing to households and various complementary programs. Auction bidding would be subject, as of 2012, to a minimum reserve auction price of between $20 and $30.14 The Bill also allows for buying allowances from other entities including international allowances.

Banking would be permitted. Limited borrowing (15% within five years) would also be permitted.15

The bill would allow entities to offset their emissions through EPA-approved domestic and international offset projects, though it has yet to be determined which international regimes would qualify. Under the bill, the EPA can approve domestic credits for the following offset projects: landfill methane, afforestation and reforestation, manure management, and coal mine methane collection. Contrary to many other cap-and-trade regimes, the bill controversially calls for the use of offsets to increase over time. In the first five years, entities would be limited to using offsets to meet five percent of their obligations; this would increase to 35 percent by 2024.16

New Regulatory Agency for Carbon Markets

The Federal Energy Regulatory Commission (FERC) would oversee the carbon markets, “monitor price and market manipulation of regulated instruments, and would be charged with promulgating regulations to prevent excessive speculation in regulated instrument trading.”17 FERC “would be authorized to assess civil penalties of $1 million per violation of the cap-and-trade law or up to three times the monetary gain obtained as a result of the violation. FERC would also be the ultimate arbiter of decisions to suspend or expel certain participants in carbon trading activity.”18

FERC would have jurisdiction over both domestic and foreign transactions involving instruments including allowances and offsets that are not otherwise regulated by the Securities Exchange Commission. It would also be charged with registering brokers and dealers. The Environmental Protection Agency’s role would be limited to managing certain offset programs and setting standards for those sources emitting less than 25,000 tons.19

The Bill would explicitly “trump” sub-national cap-and-trade programs such as the Regional Greenhouse Gas Initiative, the Western Climate Initiative, and the Midwestern Governors Greenhouse Gas Reduction Accord.20 Such federal preemption of state initiatives is governed by the Supremacy Clause of the U.S. Constitution.

Recent Developments

In an important signal of what is to come, Robert Sussman, a member of Obama’s transition team, has recently written that the Dingell-Boucher bill is inadequate due to its weaker short-term emissions reduction targets and claims that the bill would not require allowance auctioning.21 On 20 November 2008, Dingell lost the chairmanship of the Energy and Commerce Committee to House Representative Henry Waxman, who is viewed as being more closely allied with the President-elect. Senator Lieberman has announced plans to draft a new climate change bill with Senator McCain, while Senator Boxer, the Environment and Public Works Committee Chair, also intends to introduce such a bill.22