U.S. Climate Change Legislative Initiatives—An Overview
May 1, 2007
The U.S. Congress is actively considering several comprehensive climate change bills and other inter-related pieces of legislation aimed at reducing greenhouse gas (GHG) emissions levels in the United States. The bills generally propose cap and trade solutions, complemented by other energy efficiency measures, that would require power generators, fuel refineries, coal mines, smelters and other industrial entities to control their emissions growth and to ultimately reduce their emissions below certain historical levels (e.g., 1990 levels).
The Senate Bills
There are five comprehensive climate change bills pending in the U.S. Senate that are representative samples of the types of initiatives likely to be considered by the full Congress:
- Climate Stewardship and Innovation Act of 2007 (S.280)
– Lieberman (I-CT)/McCain (R-AZ) - Global Warming Pollution Reduction Act (S.309)
– Sanders (I-VT)/Boxer (D-CA) - Electric Utility Cap and Trade Act of 2007 (S.317)
– Feinstein (D-CA)/Carper (D-DE) - Global Warming Reduction Act of 2007 (S.485)
– Kerry (D-MA)/Snowe (R-ME) - Discussion Draft of Global Warming Legislation
– Bingaman (D-NM)/Specter (R-PA)
There are substantially similar companion bills pending in the House of Representatives, such as the “Climate Stewardship Act of 2007” (H.R. 620), Olver (D-MA)/Gilchrest (R-MD), as well as many other bills addressing subsets of issues related to climate change (e.g., bills proposing to conduct a 50-state survey of possible sequestration sites, to limit new construction of conventional pulverized coal plants, and to conduct periodic assessments of U.S. vulnerability to global climate change). If the House and Senate agree individually to climate change legislation, a conference committee comprising members from both bodies of Congress will negotiate to reconcile any differences between the relevant bills prior to a vote and passage by Congress.
Covered GHGs
Each bill calls for emissions caps on the six major GHGs: carbon dioxide (CO2), methane, nitrous oxide, hydrofluorocarbons (HFCs), perfluorocarbons (PFCs) and sulfur hexafluoride (SF6). In addition, the Sanders/Boxer and Kerry/Snowe bills would allow the EPA to include on the list of GHGs, after notice and comment, “any other anthropogenically emitted gas” that contributes to global warming.
Scope and Source
With the exception of Feinstein-Carper, each bill contemplates imposing emissions limits on a variety of emission sources within the U.S. economy. Feinstein-Carper would impose emissions caps only on electricity generation facilities. Under the Kerry-Snowe and Sanders-Boxer bills, the EPA would be delegated responsibility for determining the specific sources and industry sectors that would be subject to GHG emissions regulations, focusing on sectors and sources with the greatest GHG emissions or the most cost-effective opportunities to reduce emissions. The Lieberman-McCain bill would regulate electric, industrial and commercial facilities (e.g., power generation and other large emission sources) that emit 10,000 metric tons or more of GHGs per year as measured in units of carbon dioxide equivalents (CO2e) and entities that refine or import petroleum products for use in transportation or that import PFCs, HFCs and SF6 that, when used, will emit 10,000 metric tons or more of GHGs per year. The Bingaman-Specter bill would focus on coal mines, petroleum refineries, natural gas processors, fossil fuel importers, smelter operators, nitrous oxide emitters, and manufacturers and importers of HFCs, PFCs, and SF6.
Emission Reduction Targets
In order to reduce GHGs, each bill establishes emissions reduction targets and registry requirements for industry sectors and sources within the scope of the bill:
Each bill gives the administrator some discretion to adjust the emissions targets (e.g., if necessary to be more responsive to climate change or when a specific target or mitigation measure is not technologically feasible). Bingaman-Specter also would allow Congress to review whether the enacted emissions limits and other regulations remain appropriate in light of actions taken by international trading partners so that the U.S. economy does not bear a disproportion share of the global emissions reduction effort.
Emissions Allowance Allocation
In an effort to reduce the likelihood of windfall profits alleged to occur when allowances are allocated for free, the bills contemplate the possibility of allocating emissions allowances—at least in part—through the use of an auction allocation system. The Sanders-Boxer, Kerry-Snowe and McCain-Lieberman bills, respectively, would delegate to the Environmental Protection Agency (EPA), the President or the Secretary of Commerce and EPA discretion to divide and allocate allowances by auction versus for free.
Bingaman-Specter would auction 10 percent of all allowances in 2012 to 2016, with a 2 percent increase per year of auctionable allowances thereafter up to a maximum of 65 percent. The remainder of each year’s allowances would be distributed for free to industry and the states as follows:
- Industry (e.g., coal mines, refiners, electricity generators) would receive initially 55 percent of allowances from 2012 to 2016, but then the allocation would be reduced by 2 percent per year thereafter.
- States would receive 29 percent of allowances from 2012 to 2021 and 30 percent per year going forward.
Feinstein-Carper would auction 15 percent of permits in 2011, increasing the allowances auctioned by 3 percent per year for 2012 to 2031 and 5 percent per year for 2031 to 2036 until 100 percent of allowances are auctioned in 2036. Free permits would be allocated based on generation output from each covered generation facility. Feinstein-Carper also would limit free allowances for new coal generation facilities based on whether the facility uses qualifying advanced clean coal technology.
McCain-Lieberman would create an allowance allocation priority for covered sources that have registered GHG emission’s reductions prior to 2012 and to covered sources that have agreed to accelerate their emissions reductions to reach 1990 levels by 2012.
The bills provide that funds generated from allowance auctions would be held in trust and used for a variety of initiatives, including research and development on abrupt climate change and clean technology, wildlife restoration, and consumer and business subsidies to offset the adverse economic impact of climate change requirements on such entities.
Allowance Banking and Borrowing
With the exception of Sanders-Boxer, the bills contemplate options that would allow covered sources to bank their allowances for future use. In addition, McCain-Lieberman would allow covered sources to borrow credits earmarked for use one to five years in the future to satisfy up to 25 percent of a current year’s allowance requirement, subject to a 10 percent per year carrying cost reflected as an increase in the tradable allowance submission requirement for the year against which the covered source borrowed the credit. Similarly, Feinstein-Carper would give the EPA discretion to permit generators to borrow credits earmarked for use one to five years in the future to satisfy up to 10 percent of a current year’s allowance requirement, subject to an interest payment (federal short-term rate plus 2 percent) and a reduction in the allowances available to satisfy the future year’s allowance requirements.
Bingaman-Specter would implement a “safety valve” provision that would cap the price for allowances and thus help mitigate the cost of complying with the emissions reduction targets. Under the safety valve proposal, the initial price of an allowance would be capped at $7, but would increase by 5 percent per year. If allowance prices hit the applicable safety valve price in a given year, the government would treat such an event as a signal to sell additional allowances to bring prices down and mitigate compliance costs.
Offsets
The bills provide for the use of offset credits for biological/agricultural sequestration for compliance with the emissions reduction program. Bingaman-Specter and Feinstein-Carper include provisions for more general offset programs, including credits for early reduction activities, geological sequestration, methane use projects, and credits for use of covered fuels for feedstock. McCain-Lieberman would provide additional credits and allow the use of greater offset percentages from international and other credit programs by covered sources that agree to reduce their GHG emissions levels to 1990 levels by 2012. Similarly, Feinstein-Carper would allow the EPA to issue early reduction credits, in an amount up to 10 percent of the tonnage cap for 2011, for GHG reduction or sequestration projects implemented during 2000 to 2010.
Feinstein-Carper, McCain-Lieberman and Bingaman-Specter would permit covered sources to use international credits to meet a percentage of their domestic commitments, subject to confirmation that the credits were issued pursuant to programs that meet certain emissions reduction standards and that safeguards exist to prevent double counting/redemption. Under the Feinstein-Carper bill, a generator could use international credits to satisfy 25 percent of the generation facility’s total annual emissions allowance. The EPA would have discretion to allow a generator to use international credits to satisfy 50 percent of its U.S. emissions allowance if needed to avoid significant economic harm.
Energy Efficiency Performance Standards
The Kerry-Snowe and Sanders-Boxer bills would impose on retail electricity suppliers, including traditional, integrated load-serving entities and independent companies, that sell energy to consumers the obligation to reduce end use consumption and peak demand. Suppliers would have to reduce peak demand and consumption by .25 percent in 2008 and .75 percent in 2009. Thereafter, retail suppliers would be required to reduce peak demand by an additional 1 percent per year up to 11.75 percent in 2020. Retail suppliers would be required to reduce consumption by an additional .75 percent per year up to 9 percent in 2020. The EPA would establish a trading system that would allow retail suppliers to trade credits related to the above requirement. States are permitted to impose more stringent requirements.
The Sanders-Boxer bill would require electric generation facilities that become operational after December 31, 2011, and that provide electricity at a minimum capacity factor of 60 percent to have an emissions rate that is no higher than a new gas-fired combined-cycle generation facility. The EPA would have authority to raise this performance threshold. Beginning in January 2031, all generation facilities, regardless of when they were put in service, would be required to have an emissions rate that comports with the new gas-fired combined-cycle generation facility standard.
Sanders-Boxer also would require generation facilities with a capacity of 25 MWs or greater and that have a fuel input of at least 50 percent from coal, petroleum coke, lignite or any combination thereof to supply a percentage of its base quantity of electricity from low-carbon generation (i.e., fueled by coal, coke, lignite, biomass or any combination thereof and that emits no more than 250 pounds of CO2/MWh). The requirement would begin in 2015 with a minimum annual low carbon supply percentage of .5 percent, increasing to 1 percent in 2016 and increasing by an additional 1 percent per year thereafter until the minimum annual low carbon supply percentage reaches 5 percent in 2020. The EPA could increase the annual minimum low carbon supply amount by 2 percent per year during the period of 2021 to 2025 and 3 percent per year for 2026 to 2030. The bill would exempt a generator for a calendar year that sold less than 40,000 MWhs in the preceding calendar year.
Renewable Portfolio Standard
The Kerry-Snowe and Sanders-Boxer bills include a Renewal Portfolio Standard (RPS) that would require retail electric suppliers to purchase energy from renewable sources other than energy generated from municipal solid waste, wood contaminated with plastics or metals, or tires. Under Sanders-Boxer, beginning in 2008 to 2009, retail electric suppliers would use an annual minimum of 5 percent of supply generated from renewable sources. The renewable source supply amount would increase by 5 percent in five-year blocks until it reaches 20 percent in 2020. Kerry-Snowe would impose comparable requirements, but one year later than the schedule included in the Sanders-Boxer bill.
State GHG and Other Efficiency Programs
The bills are silent on whether federal climate change laws would pre-empt state or regional program requirements like those being implemented in California and the West, and New York and New England.
