On October 7, 2008, the U.S. House Committee on Energy and Commerce released a discussion draft of climate change legislation. The discussion draft, sponsored by Chairman Rick Boucher and Chairman John Dingell, would amend the Clean Air Act to establish a U.S. economy-wide cap-and-trade program to reduce greenhouse gas (GHG) emissions. The purpose of the discussion draft is to present options and stimulate comments from Committee members and interested stakeholders in order to inform further deliberation. Set forth below are the key issues of the discussion draft.
Reducing U.S. GHG Emissions
The draft proposes a U.S.-wide cap-and-trade program covering approximately 88 percent of U.S. GHG emissions, which would reduce covered emissions to 6 percent below 2005 levels by 2020, 44 percent below 2005 levels by 2030, and 80 percent below 2005 levels by 2050. The cap-and-trade program would cover carbon dioxide, methane, nitrous oxide, sulfur hexafluoride, nitrogen trifluoride and other emissions as designated by the Environmental Protection Agency (EPA). Hydrofluorocarbons would be covered separately from other gases by amending Title VI of the Clean Air Act.
The proposed cap would cover power plants, producers and importers of petroleum and other fossil-based fuels, large industrial facilities, producers and importers of other bulk gases, natural gas local distribution companies and geologic sequestration sites. The draft also authorizes the EPA to establish industry-specific emission standards, which could cover smaller sources of GHG emissions (those that emit less than 25,000 tons of GHGs a year).
Managing Costs of Mandatory GHG Emissions Reductions
The draft provides flexibility to emitters by creating incentives for sources to use low-cost compliance strategies and encouraging technological innovation. The draft claims that the emissions caps in the program’s early years would be set to provide a reasonable transition period to help to contain costs. Specific flexibility mechanisms built into the discussion draft’s cap-and-trade program include the ability of emitters to bank and borrow emissions allowances, allowing emitters to purchase EPA-approved U.S. and international offsets to meet a portion of their compliance obligation, and a “safety-valve”—if the price of allowances reaches a predetermined level, emitters would have access to a “strategic reserve” of allowances.
Allocation of Emissions Allowances
The draft suggests that in the early years of the program, some allowances be distributed without charge to individual sectors. The number of free distributed allowances gradually would decrease until all allowances would be auctioned starting in 2026. The draft presents four options for allocating allowances:
- Modeled after the SO2 control Acid Rain program, Option A focuses on minimizing compliance costs for regulated entities by allocating allowances without charge. Under Option A, the electricity sector would receive the largest percentage of allowances allocated to any sector.
- Option B provides fewer allowances to entities in the various covered sectors and directs more allowances toward complementary programs that help to reduce GHG emissions, such as energy efficiency programs.
- Option C also offers the covered sectors fewer allowances, alternatively directing the proceeds from allowances auctions to domestic adaptation programs and international clean technology and adaptation programs.
- Option D would not allocate any allowances to certain sectors, including the electricity sector, but instead would direct the majority of the proceeds from allowance auctions to be used to reduce the costs of GHG emission reductions to consumers, through programs such as a “Low Income Consumer Climate Change Rebate” program.
The draft amends the Federal Power Act and assigns the carbon market oversight role to the Federal Energy Regulatory Commission (FERC). It proposes the establishment of an Office of Carbon Market Oversight (OCMO) within FERC, which will have exclusive jurisdiction over “regulated allowance and allowance derivative instruments not subject to the securities laws.” The OCMO would be tasked with developing regulations to implement its authority and coordinating with the EPA. The draft also would expand FERC’s anti-manipulation authority to cover the carbon markets.
Increasing Energy Efficiency
The draft contains numerous provisions designed to promote energy efficiency, including allocating allowances to State Energy Efficiency Development Funds, from which individuals and businesses could obtain low- or no-interest loans to upgrade the efficiency of buildings, appliances, industrial processes or vehicles. The draft also would increase building code energy efficiency standards by 30 percent by 2010 and 50 percent by 2020.
Spurring the Development of Clean Technologies
The draft would establish a bonus allowance system in which power plants and other large emitters would be rewarded for carbon capture and storage. Renewable generators also would receive rewards from a separate bonus allowance pool.
The draft recognizes that climate change is a global issue, and therefore international linkages will be necessary to address it. To that end, the draft provides that international allowances and offsets, if approved by the EPA, may be used by emitters to meet portions of their compliance requirements. In addition, the draft proposes to establish an International Climate Change Commission that will enforce the U.S. climate change rules as they pertain to importers of covered goods.
Both Chairmen acknowledge that reaching a consensus on climate change regulation will be a long and difficult process, but they are hoping that this discussion draft will serve as a starting point. All interested parties are invited to comment.