The Energy and Commerce Committee of the US House of Representatives has been working, under the chairmanship of Henry Waxman (Dem., California) in order to draft legislation that will, among other things, initiate a cap and trade system for the exchange of emission allowances or permits in the United States. The draft bill is called The American Clean Energy and Security Act of 2009 (ACES) and is stated to be a comprehensive approach to America's energy policy that charts a new course towards a clean energy economy. The goal of the legislation as stated by Edward J. Markey, Chairman of the Energy and Environment Subcommittee of the Energy and Commerce Committee is to create clean energy jobs in the United States and to reduce America's dependence on foreign oil.

In order to meet these goals, the legislation covers four principal areas:

  • Title I - Clean Energy;
  • Title II - Energy Efficiency;
  • Title III - Global Warming; and
  • Title IV - Transitioning to a Clean Energy Economy.  

Below you will find the highlights of the broad outlines of each of these titles.

  1. CLEAN ENERGY

Renewable Energy. A national renewable energy portfolio requirement is proposed, not unlike the programs that had been enacted in various states. This will require electricity suppliers to meet a certain percentage of the load with electricity from renewable sources. The requirement will begin at 6 % in 2012 and rise to 25 % in 2025.

Carbon Capture and Sequestration (CCS). CSS will be promoted and incentives for the wide scale commercial deployment of CCS are included in the draft, including performance standards for new coal-fired power plants.

Clean Fuels. A new low carbon fuel standard is established and advanced biofuels and other clean transportation fuels are promoted. The draft also authorizes financial support for cities, states or private companies for large scale demonstration of electric vehicles and authorizes financial support to car companies to retool their plants to build electric vehicles.

Smart Grid in Electricity Transmission. The draft facilitates the deployment of a smart grid and directs the Federal Energy Regulatory Commission to reform the regional planning process to modernize the electrical grid and provide for new transmission lines to carry electricity generated from renewable sources.

Partnering with the States. A program is created to permit each state energy office to establish a State Energy and Environment Development (SEED) Fund, which will serve as a common repository for federal financial assistance for clean energy and energy efficiency projects.

Federal Purchases of Renewable Electricity. The draft authorizes federal agencies to enter into long term contracts to purchase renewable electricity.

  1. ENERGY EFFICIENCY

Building energy efficiency. Energy efficiency in new buildings is promoted. The draft authorizes funding for retrofitting existing commercial and residential buildings to improve their energy efficiency and directs the Environmental Protection Agency (EPA) to develop procedures for rating building efficiency.

Manufactured homes. Low income families residing in pre 1976 manufactured homes are provided with rebates toward the purchase of a new, energy efficient home.

Appliance energy efficiency. Negotiated agreements on efficiency standards for lighting and agreements for other appliances are codified and the draft makes changes to the current process for setting energy efficiency standards. It also creates a program to provide financial incentives to retailers who sell high volumes of "Best in Class" appliances.

Transportation efficiency. The President is directed to work with the relevant agencies in California to harmonize fuel economy standards. The draft also directs the EPA to set emission standards for other mobile sources of pollution such as locomotives, marine vessels and non road sources. States are required to establish goals for reducing global warming pollution from the transportation sectors and large metropolitan planning organizations must submit transportation plans to meet those goals. Also, the EPA is authorized to carry out the SmartWay transportation efficiency program to increase the efficiency of highway trucking.

Utilities Energy Efficiency. A new energy efficiency resource standard is established to enlist electricity and natural gas distribution companies in the effort to increase energy efficiency. The efficiency standard begins with a 1% electrical savings and a 0.75% natural gas savings in 2012 and gradually increases to a 15% cumulative electricity savings and a 10% cumulative natural gas savings by 2020.

Industrial energy efficiency. The Secretary of Energy must establish standards for industrial energy efficiency. The draft also creates an awards program for innovation in increasing efficiency of thermal electric generation process.

Public and federal energy efficiency. The draft amends the Energy Independence and Security Act of 2007 to include non profit hospitals and public health facilities among public institutions eligible for grants and loans for energy efficiency.

  1. REDUCING GLOBAL WARMING POLLUTION

Global Warming Pollution Reduction Program. A market based program is established for progressively reducing global warming pollution from electric utilities, oil companies, large industrial sources, and other covered entities that collectively are responsible for 85% of US global warming emissions. Under the program, covered entities will be issued allowances for each ton of pollution emitted into the atmosphere. Entities that emit less than 25,000 tons per year of CO2 equivalent are not covered by the program. However, where an entity would have been covered had it emitted 25,000 tons of CO2 equivalent, that entity will have a reporting threshold of 10,000 tons of CO2 equivalent.

The program will reduce the number of available allowances issued each year to ensure that aggregate emissions from the covered entities are reduced by 3% below 2005 levels in 2012, 20% below 2005 levels in 2020, 42% below 2005 levels in 2030, and 83% below 2005 levels in 2050.

Supplemental Pollution Reductions. The EPA is directed to achieve additional reductions in global warming pollution by entering into agreements to prevent international deforestation.

Offsets. Covered entities will be allowed to use offsets to meet their compliance obligations. The total quantity of offsets allowed into the program in any year will not exceed 2 billion tons, which will be split evenly between domestic and international offsets. Covered entities that use offsets must submit 1.25 offset credits for every ton of emissions being offset.

Banking and Borrowing. Unlimited banking of allowances for use during future compliance years is permitted and the draft establishes rolling two-year compliance periods, which will allow covered entities to borrow allowances from one year ahead without penalty. The draft further states that allowances from two to five years in the future can be borrowed subject to an obligation to retire more allowances than are being borrowed.

Strategic Reserve. The EPA is directed to create a strategic reserve of about 2.5 billion allowances by setting aside some of the allowances authorized to be issued each year. These allowances will be made available through quarterly auctions if allowance prices rise to unexpectedly high levels. The proceeds of the auction will be used to replenish the strategic reserve.

Carbon Market Assurance and Oversight. The Federal Energy Regulatory Commission is charged with regulating the cash market in emission allowances and offsets. The President is directed to delegate regulatory responsibility for the derivatives market to an appropriate agency (or agencies).

Additional Greenhouse Gas Standards. The EPA is directed to set emission standards on sources that are not covered by the allowance system. The draft bill creates special programs to reduce emissions of two pollutants: hydrofluorocarbons (HFCs) and black carbon.

Clean Air Act Exemptions. The draft provides that CO2 and other greenhouse gases may not be regulated as criteria pollutants or hazardous air pollutants on the basis of their effect on global warming.

  1. TRANSITIONING TO A CLEAN ENERGY ECONOMY

Ensuring Domestic Competitiveness. To ensure that US manufacturers are not disadvantaged, the draft bill authorizes companies in certain industrial sectors to receive rebates to compensate for additional costs incurred by compliance with the Global Warming Pollution Reduction Program. Sectors that use large amounts of energy, and produce commodities that are traded globally, would be eligible. In the event these measures are not sufficient, the President is directed to establish a border adjustment program under which foreign manufacturers would be required to pay for and hold special allowances to cover the carbon contained in US. bound products.

Exporting Clean Technology. The US will provide assistance to encourage widespread deployment of clean technologies to developing countries. This will be limited however to developing countries that have ratified international treaties and undertaken appropriate national mitigation activities.

Adapting to Global Warming. The draft bill establishes an interagency council to ensure an integrated federal response to the effects of global warming. To address international adaptation issues, the draft creates an international climate change adaptation program within USAID to provide U.S. assistance to the most vulnerable developing countries for adaptation to climate change.

As follow up to the subject matter of this draft legislation, Gowlings Climate Change Group will be delivering in-depth analysis of the measures being proposed in the Global Warming Pollution Reduction Program and contrasting these with the Canadian Government's "Turning the Corner" action plan to reduce greenhouse gases. We will also be monitoring the application of the measures proposed in order to protect American industry from any anti-competitive effects of the imposition of carbon constraint.

While there will without a doubt be changes to the draft bill and months of negotiation, the United States has taken a first step (again) toward the implementation of widespread carbon constraint and the creation of a market to trade carbon emissions. It has done so in the context of a bill that, at least in its first iteration, seeks to change substantially the direction of US energy policy and to move the world's largest economy toward a significant increase in the use of renewable energy and the reduction of its greenhouse gas emissions.