On March 31, 2009, Rep. Henry Waxman (D-CA), Chair of the House Committee on Energy and Commerce, and Rep. Ed Markey (D-MA), Chair of the Subcommittee on Energy and the Environment, released a “discussion draft” of new comprehensive energy and climate change legislation. This wide-ranging bill, called the “American Clean Energy and Security Act of 2009,” addresses a number of priority issues for the Democratic leadership and the Obama Administration, including promoting the use of renewable energy by electricity generators and low-carbon fuels in the transportation sector. It would also create an economy-wide cap-and-trade program aimed at reducing emissions of carbon dioxide and other greenhouse gases (GHGs) by 83% from 2005 levels by 2050. The Federal Energy Regulatory Commission (FERC) would oversee the new carbon emission market.

Chairman Waxman also released a schedule for consideration of the bill. The Energy and Environment Subcommittee will hold a hearing the week of April 20, followed by a Subcommittee mark-up the week of April 27. The full Committee plans to mark-up the bill the week of May 11. House Speaker Nancy Pelosi (D-CA) has promised consideration of the bill on the House floor before the August recess. The Chair of the Senate Committee on Environment & Public Works, Sen. Barbara Boxer (D-CA), has not introduced a climate change bill yet and recently indicated the Senate may not consider its own bill but instead will consider the House climate change bill during the Conference on the broader energy bill.

The following is an overview of the bill’s broad reach, with a focus on the structure of the proposed cap-and-trade program.

1. Cap-and-Trade Program: The bill would create an economy-wide cap-and-trade program beginning in 2013 that would reduce GHG emissions by 3% of carbon dioxide equivalents (COe) emitted in 2005, and would eventually lead to an 83% reduction by 2050. 2

Covered GHGs: The bill would apply the cap to the six most commonly cited GHGs: carbon dioxide, methane, nitrous oxide, sulfur hexafluoride, hydrofluorocarbons emitted as a byproduct, and perfluorocarbons. It also adds a seventh GHG to the list: nitrogen trifluoride. The Environmental Protection Agency (EPA) would have the ability to add to the list other emissions that contribute to climate change.

Covered Entities: The following entities are categorically included in the cap-and-trade program established by the bill, without reference to their direct or indirect GHG emissions:  

  • Coal-based liquid or gaseous fuel producers  
  • Electricity sources (i.e., a stationary source that includes one or more utility units)  
  • Geologic sequestration sites  
  • Petroleum refiners  
  • Ammonia and lime manufacturers  
  • Producers of: adipic acid, cement (excluding grinding-only operations), hydrochlorofluorocarbons, nitric acid, phosphoric acid, primary aluminum, silicon carbide, soda ash or titanium dioxide  
  • Sources in the Chemical/Petrochemical Sector that manufacture: acrylonitrile, carbon black, ethylene, ethylene dichloride, ethylene oxide or methanol

The following entities are also regulated entities, provided they meet or exceed a specified annual emission level or other threshold in 2008 or any subsequent year.

Allocation Versus Auction: The bill would establish the total number of allowances that the EPA would issue each year to implement the cap. However, the bill does not address the number of allowances that would be allocated for free versus sold through quarterly auctions.  

Offsets: The bill would allow covered entities to meet their compliance obligations using offsets, but leaves it to the EPA to decide what qualifies as an offset. The total offsets available cannot exceed 2 billion mt, unless the President adjusts that amount up or down. Entities can earn one offset for each ton of CO2e emissions that are avoided/reduced, including those earned from qualified early offset projects initiated after January 1, 2001. However, covered entities that want to rely on offsets to meet their compliance obligations must submit 1.25 offset credits in lieu of 1 allowance. A new Offset Advisory Board would help the EPA establish and ensure the integrity of the offset program.  

International Allowances: A covered entity can use qualified international allowances to meet its compliance obligations.  

Banking and Borrowing: Covered entities would be allowed to borrow emissions allowances with a vintage year of 1 to 5 years in the future to satisfy up to 15% of their annual compliance obligation, but must repay the borrowed allowances with interest. In addition, the program would allow unlimited allowance banking for use in future reporting periods.

Strategic Reserve: The bill does not establish a safety valve or cap on the price of an allowance purchased in quarterly auctions, but covered entities would be allowed to purchase allowances through a “strategic reserve” auction to meet up to 10% of their compliance obligations. The reserve is intended to ensure that a set number of allowances (5% of the allowances for years 2012 through 2016 and 10% for 2017 on) are available from the government in quarterly auctions at a minimum price.  

GHG Registry: The bill would require covered entities and other emitters to report their GHG emissions to the EPA. For the base period of 2007 to 2010, data would be reported by no later than March 31, 2011. For 2011 and each subsequent year, data would be reported quarterly.  

State Pre-emption: The bill expressly pre-empts states from capping the same emissions that are capped by the bill, but only from 2012 through 2017. The bill provides a mechanism by which persons holding allowances issued by the State of California or the Regional Greenhouse Gas Initiative before December 31, 2011 can exchange their allowances for EPA allowances.  

Market Oversight: The EPA would be responsible for implementing GHG reporting and for the initial distribution of allowances. However, the bill would give FERC authority over “regulated allowances” (allowances and offset credits issued under the statute). Among other powers, FERC would have authority to establish rules (1) to prevent fraud, manipulation and excess speculation, (2) to promote market transparency, and (3) to address position limits, margin requirements, best execution practices, risk management, and qualifications to register and operate trading facilities or clearing organizations. FERC also would have enforcement authority that includes (1) revoking trading privileges and registrations, (2) imposing civil penalties that are the higher of $1 million or three times the monetary gain from a violation, and (3) cease-and-desist authority. 

The bill would establish a working group to issue regulations for the establishment, operation and oversight of the markets for “related allowance derivatives” (instruments that have the characteristics of put and call options, swap agreements, privilege, indemnity, advance guaranty, decline guaranty, or a contract of sale for future delivery that has a value expressly linked to a regulated allowance or allowance derivative).  

Finally, the bill would make it a felony punishable by a fine not to exceed $25 million (or $5 million in the case of an individual) or imprisonment for not more than 20 years, or both, for any person, directly or indirectly, to (among other things):

  • Knowingly use any manipulative or deceptive device to corner or attempt to corner the regulated instrument;  
  • Deliver or cause to be delivered a knowingly false, misleading or inaccurate report concerning information or conditions that affect the price of a regulated allowance;  
  • Knowingly make in an application, report or document a statement that is false or misleading with respect to a material fact; or  
  • Knowingly falsify, conceal or cover up by any trick, scheme or artifice a material fact, or make any false, fictitious or fraudulent statements or representations, to an entity on or through which transactions in regulated allowances or derivatives occur, or are settled or cleared.  

In addition, a person found guilty of a felony may be prohibited or limited from holding or trading regulated instruments.

2. Renewable Portfolio Standard: The bill would require utilities to obtain 6% of their power from renewable energy resources by 2012, rising to 25% by 2025. “Renewable energy resources” generally include wind, solar, geothermal, biomass or landfill gas, marine or hydrokinetic, and certain qualified hydropower projects. Parties would comply by generating or otherwise obtaining federal renewable energy credits (RECs), which would be issued by the Department of Energy (DOE) for each megawatt hour of renewable energy generated. In lieu of obtaining credits, parties may make an alternative compliance payment equal to the lesser of: (1) twice the average market price for RECs for the preceding compliance year; or (2) $50 (adjusted annually). The bill would also allow state governors to petition for a one-fifth reduction in the annual renewable energy obligation for utilities in their state, which DOE must grant if the covered utilities are complying with a separate energy efficiency standard established by the bill.

3. Low Carbon Fuel Standard: The bill includes a low-carbon fuel standard (LCFS) applicable to refiners, importers and blenders of all transportation fuels (broadly defined as any fuel for use in motor vehicles, non-road vehicles and aircraft). The proposed standard would require EPA to issue regulations ensuring that, starting in 2014, the life-cycle GHG emissions of transportation fuels do not exceed 2005 emission levels. Notably, renewable fuels used to meet the Renewable Fuel Standard (RFS) would be exempt from this initial requirement. By 2023, life-cycle GHG emissions would have to be at least 5% below the 2005 baseline, and by 2030, 10% below the 2005 baseline. The bill directs EPA to implement a credit generation and trading scheme to facilitate compliance. The LCFS would eventually succeed the current RFS program, which the bill would terminate as of January 1, 2023.

4. Restricting Clean Air Act Authority to Regulate GHGs: To avoid duplicative regulation of GHG emissions, the bill would strip EPA of most of its authority to regulate GHGs as pollutants under other parts of the Clean Air Act. The bill does, however, direct EPA to codify new source performance standards for GHG emissions from certain source categories that are not subject to the cap-and-trade program created by the bill, but whose members individually emitted more than 10,000 mt of CO2e.

5. Carbon Capture and Sequestration: The bill establishes rulemaking authority to facilitate the commercial deployment of carbon capture and sequestration (CCS) technology. Specifically, EPA would be required to issue regulations within two years of the legislation’s enactment that establish a program to distribute authorized funds to support the use of CCS technologies for electric power generation and other industrial operations. The draft also promotes the development of a CCS national strategy and the development of regulations for the certification and permitting of geologic sequestration sites.

6. Smart Grid: The bill seeks to enhance the efficient use of electricity through the development and use of smart grid technologies. In particular, the bill’s provisions would seek to reduce utility peak loads through the effective management and distribution of electricity supply. The bill also promotes the use of smart grid capabilities in home appliances.

7. Transmission Planning: The bill would require FERC to adopt national grid planning principles that would be applied to ongoing and future transmission planning to encourage the deployment of renewable energy and other zero-carbon energy sources.

8. Energy Efficiency: The bill directs the EPA to develop rules for rating building energy efficiency. It also creates an “Energy Efficiency Resource Standard” to mandate reduced consumption of electricity and natural gas through “utility efficiency programs, building energy codes, appliance standards, and related efficiency measures.” LDCs must demonstrate that customers have achieved specified levels of electricity or natural gas savings relative to “business-as-usual” projections. Specifically, they must show a 1% electricity savings and 0.75% natural gas savings by 2012, increasing gradually to a 15% electricity savings and 10% natural gas savings by 2020.

9. Imports: The bill requires foreign manufacturers in certain industrial sectors (to be determined by the EPA) to purchase special allowances to cover carbon emissions represented by exports to the United States. This provision applies only if domestic manufacturers are unable to collect adequate compensation for the additional costs of cap-and-trade compliance through new EPA-directed rebate programs for the affected industries.

10. Deforestation: The bill would allow the United States to achieve emissions reductions by promoting investment in projects that reduce deforestation in developing countries. Projects that limit deforestation in developing countries could generate credits that covered entities could use to meet compliance obligations in the U.S. carbon markets, as well as result in avoided emissions that would have occurred from deforestation. In addition, international deforestation credits could be used in the strategic reserve allowance auctions that covered entities can access to meet their compliance needs if that reserve allowance pool is depleted.