Publication

May 20, 2010Client Alert

New Federal Climate Change Legislation Unveiled by Senators Kerry and Lieberman

On Wednesday, May 12, 2010, Senators John Kerry (D-Mass.) and Joe Lieberman (I-Conn.) formally introduced a new climate change bill, known as the American Power Act. The draft was originally scheduled to be introduced in April 2010; however, the rollout of the bill encountered setbacks after Senator Lindsey Graham (R-S.C.) walked away from the negotiation table just before the bill was set to be finalized.

According to Sens. Kerry and Lieberman, the legislation is intended to reduce carbon emissions by 17 percent by 2020, and 80 percent by 2050. The bill, which has important similarities to and differences from the Waxman-Markey bill passed by the U.S. House of Representatives in 2009, focuses on creating a carbon emission trading system. The draft legislation has received mixed reviews, with some utilities, oil companies, and business leaders voicing support and other groups, such as the Sierra Club and the Institute for Energy Research, raising questions over certain provisions of the draft.

As currently drafted, some key measures of the bill include:

Limits EPA Role in Regulating Greenhouse Gases Under Clean Air Act: The bill restricts the ability of the U.S. Environmental Protection Agency (“EPA”) to regulate greenhouse gases (“GHGs”) through the Clean Air Act. Over the past several months, EPA has made sweeping efforts to regulate GHGs through the Clean Air Act’s permitting programs. EPA’s most recent effort to limit GHGs, the “tailoring rule”, was announced May 13, 2010, just one day after the bill was introduced into the Senate. If the Kerry/Lieberman legislation passes, it would nullify EPA’s “tailoring rule”, which requires certain GHG emitters to obtain construction and operating permits. More information regarding EPA’s “tailoring rule” can be obtained from an earlier alert entitled EPA Issues Its Final Rule Regulating Greenhouse Gases – Initial Limiting its Reach to the Largest Stationary Sources. While preempting the EPA from regulating GHG emissions through the Clean Air Act, the bill would allow EPA to set technology-based new source performance standards for GHG emitters that are not already subject to the cap-and-trade program, as further specified below.

Preempts State Cap-and-Trade Programs: In addition to preempting EPA’s efforts to regulate GHGs, the bill preempts any state implementation of a cap-and-trade program, which the bill defines as a GHG regulation system in which a state issues a certain number of tradable instruments and requires GHG sources to surrender these instruments for each GHG unit emitted. This provision is a response to criticism over the patchwork regulatory system that results from individual states or regions passing their own version of GHG regulations. The draft legislation, however, explicitly exempts the regulation of motor vehicle emissions from this restriction. Thus, states, such as California, will continue to have the ability to control motor vehicle emissions within their boarders.

Implements a Nationwide Cap-and-Trade System: The bill mandates a reduction in greenhouse gas emissions through a cap-and-trade system. Starting in 2013, the bill limits GHG emissions by capping emissions from the electric power sector, transportation fuels and other refined oil products. The bill extends to large industrial GHG sources (sources that emit more than 25,000 tons of CO2 equivalent (“CO2e”) annually) and to distributors of natural gas in 2016. This means, if passed, the bill will affect only about 7,500 facilities when the economy wide cap-and-trade system is implemented in 2016.

The cap-and-trade program has provisions governing distribution of allowances and off-set credits. The bill does create a “hard price collar” to keep prices stable and fixes an inflation rate to raise prices over time. Introductory floor price is set at $12 per ton of CO2e to increase three percent over inflation annually. Introductory ceiling price is set at $25 per ton of CO2e to increase five percent over inflation annually.

For the first 12 years of the program, however, free allowances would be distributed to utilities, natural gas distributors, states, localities, and others to reduce the cost of the program on consumers. By 2026, 8.1% of allowances will be auctioned off and the percentage increases annually until 2035, at which time, and for every subsequent year, 77.8% of allowances will be auctioned off. The proceeds from the auctioned allowances will go into a universal trust fund. The trust fund will distribute the proceeds for various purposes, one of which is deficit reduction. A portion of the allowances proceeds would also be returned to consumers through income tax credits.

In addition to allowances, the program sets up an offset credits system. According to the draft legislation, the program will manage the issuance of offset credits from emission reductions from domestic sources not already subject to regulation. Under the bill, government officials will establish and list the types of projects that will be eligible to generate offset credits. Initially, projects such as methane collection at mines, landfills, and natural gas systems; reforestation of acreage not recently forested; recycling and waste minimization; and projects that reduce the intensity of GHG emissions at agricultural facilities will be eligible to generate offset credits. However, as currently drafted, government officials will then be able to add, remove and modify activities from the list of eligible projects. Moreover, government officials will establish certain performance standards and standardized methodologies to verify that the activities on the eligible projects list meet the requirements for offset credits, including reducing GHG emissions.

In an effort to tighten up procedures from prior cap-and-trade bills, one offset credit shall be issued for each ton of CO2e emission reductions from an eligible offset project. As currently drafted, the Kerry-Lieberman bill allows for up to two billion tons of GHG offsets annually, but limits international offsets to 25 percent of the total offsets.

For entities that predate this federal program, the bill provides a method for such activities to be approved as a qualified early offset program. Under the legislation, government officials shall approve any regulatory or voluntary GHG offset programs as a qualified early offset program if such program was established prior to January 1, 2009, has a developed public offset program methodologies and requires emission reductions to be verified by a state or independent agency.

Encourages Nuclear Energy: The legislation also encourages the creation of new nuclear power plants through financial incentives such as: $54 billion in loan guarantees, accelerated depreciation for plants, and additional investment tax credits for new construction. In addition, it revises the process for obtaining plant licenses by streamlining the approval process.

New Offshore Drilling Regulations: Under the bill, coastal states can opt-out of offshore drilling up to 75 miles off their shores. Any state directly impacted by drilling efforts can veto any drilling plans upon showing they stand to suffer significant adverse impacts in the event of a drilling accident. In addition, states that pursue offshore drilling will receive 37.5 percent of revenues, which is to be used to protect coastlines and coastal ecosystems.

Transportation Improvements: Over $7 billion annually is designated to improve transportation systems, including both highways and mass transit. Transportation emissions will be subject to the GHG emissions cap. In addition, the bill commissions a national plan to encourage the development of electric motor vehicles.

Exemption for Farming Activities: The draft legislation exempts farmers from the GHG emission compliance obligations while setting aside several billion dollars to be used as incentives for farmers to reduce GHG emissions from their lands. The USDA is set to head up this domestic offset program.

Clean Coal: Provides annual incentives of $2 million for research and development of clean coal technologies, including effective carbon recapture and sequestration methods.

Import Restrictions: Absent a global agreement on climate change dictating otherwise, imports from countries that have not taken action to limit GHG emissions must pay a comparable amount at border to avoid so-called “carbon leakage”.

The introduction of the bill will no doubt reenergize the debate concerning GHG emissions, climate change and who will be the winners or losers in a carbon constrained economy.

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