House Approves Historic Climate Legislation; Bill Moves to Senate

The U.S. House of Representatives narrowly approved comprehensive climate change legislation on June 26, 2009. Sponsored by Representatives Ed Markey, D-Mass., and Henry Waxman, D-Calif., H.R. 2454, the American Clean Energy and Security Act of 2009 (ACES) would establish a mandatory cap and trade program designed to reduce U.S. greenhouse gas (GHG) emissions 83 percent by 2050. The bill also sets renewable-energy production and energy-efficiency standards for electric utilities, and contains a variety of provisions intended to promote clean technologies.

Weeks of intense negotiations produced a number of key changes to the legislation, including inserting a system for distributing emissions allowances and compromises regarding emissions offsets. ACES now moves on to the U.S. Senate, where it is expected to be debated in the fall.

The cap and trade program

The core of ACES is a mandatory cap and trade program for reducing GHG emissions. Under this program, covered entities must acquire tradable federal emissions “allowances” for each ton of carbon dioxide (CO2) or CO2 equivalent emitted. Covered entities include electric utilities, suppliers of GHG-producing fuels and chemicals, and industrial facilities, such as cement or glass manufacturers, with annual GHG emissions greater than 25,000 metric tons of CO2 equivalent. The system is designed to avoid double counting of emissions, thus utilities and other large emitters would not need allowances for GHG-producing fuels that are accounted for “upstream” at the supplier level (e.g., liquid hydrocarbon fuels).

The cap and trade program would begin for utilities and most fuel suppliers in 2012 by distributing allowances to covered entities in an aggregate quantity 3 percent below 2005 levels. Industrial sources must obtain allowances beginning in 2014, and local natural gas distributors must join the program in 2016. Allowances would be reduced in subsequent years in order to achieve a 17 percent reduction below 2005 levels by 2020, 42 percent by 2030, and 83 percent by 2050. Covered entities would have the opportunity to acquire allowances on the open market to account for their annual emissions.

Under the final House bill, most allowances would be initially distributed by the U.S. Environmental Protection Agency (EPA or Agency) for free to certain covered entities. ACES would also give allowances to certain non-capped entities to sell as a fundraising mechanism for climate-related projects. States, for example, would receive allowances to boost wildlife and natural resources climate adaptation programs, and the agricultural sector would receive allowances to jumpstart programs to sequester GHG emissions. Covered entities would also receive “early action” allowances as compensation for emissions reduced or offsets developed before Jan. 1, 2009. A relatively small percentage of allowances would be auctioned in the early years of the cap and trade program.

Emissions offsets

Offset credits represent an alternative means of compliance with emissions caps. Instead of acquiring allowances to account for their full GHG emissions, covered entities may obtain credits for funding GHG emissions-reducing activities by non-capped entities (e.g., forestland conservation easements). The final House bill allows for up to 2 billion tons worth of GHG emissions to be offset each year, representing about 27 percent of total annual GHG emissions in the United States. Offset projects may take place outside of the U.S. as well as domestically.

Although the EPA oversees most offset projects, a late amendment to ACES creates a special category of domestic agricultural and forestry-related offsets to be administered by the U.S. Department of Agriculture (USDA). Unlike EPA offset credits, which EPA may only issue for activities that result in permanent emissions reductions, USDA may issue credits for activities that temporarily reduce emissions. USDA “term offset credits,” for example, are available for projects that reduce emissions for five years or less. Entities using term offset credits are required to demonstrate compliance with emissions caps through the acquisition of sufficient allowances or other offsets before the expiration date of any term offsets.

ACES as an alternative to EPA climate regulation under the Clean Air Act

The ACES cap and trade program represents an alternative to EPA regulation of GHGs under the Clean Air Act. In the 2007 case of Massachusetts v. EPA, 549 U.S. 497, the U.S. Supreme Court held that GHGs are pollutants under the Clean Air Act and ordered EPA to determine whether or not such gases cause or contribute to pollution that may endanger human health.

In response to the Court’s order, in April EPA issued a proposed “endangerment” finding (please see our April 17, 2009, advisory) that, once finalized, will require EPA to regulate GHGs under the Clean Air Act. EPA also took another major step toward GHG regulation in April when it published a draft rule requiring reporting of GHG emissions (please see our March 27, 2009, advisory). Last month, the Agency declined to extend the public comment period on the proposed rule, keeping EPA on schedule to finalize the rule before the end of the year and require emissions tracking beginning Jan. 1, 2010. ACES would specifically prevent EPA from regulating GHGs as criteria pollutants or hazardous air pollutants under the Clean Air Act; instead the Agency would regulate GHGs according to ACES.

Renewable energy and energy efficiency

ACES requires electric utilities to boost generation from renewable sources and to improve energy efficiency. Beginning in 2012, retail electricity suppliers must meet specified percentages of electricity demand through renewable energy and conservation. This requirement starts at 6 percent in 2012 and gradually rises to 20 percent in 2020. The House bill similarly requires the federal government to purchase an increasing percentage of its electricity from renewable sources over time.

ACES also provides incentives to promote energy-efficient buildings. Specifically, it provides for federal training and funding assistance to states that adopt advanced building-efficiency codes. Furthermore, the bill authorizes federal funding for retrofitting existing commercial and residential buildings to improve energy efficiency.

Other clean-technology provisions

ACES contains a variety of mechanisms to promote clean technologies including carbon capture and sequestration, biofuels, electric vehicles and the deployment of a smart electric grid. The House bill would create a new federally owned independent corporation, the Clean Energy Deployment Administration, to finance the development of technologies that reduce GHG emissions.

Many late amendments to the House bill can be found in the manager’s amendment.