Originally published November 23, 2009

Keywords: Democrats, Senate Environmental Committee, Clear Climate Bill, Environment and Public Words, EPW, Kerry-Boxer bill, Clean Energy Jobs and American Power Act, climate bill, EPA, energy efficiency, renewable energy, Clean Air Act, CAA

On November 5, 2009, the Senate Environment and Public Works (EPW) Committee adopted S. 1733 (known as the "Kerry-Boxer bill" and as the "Clean Energy Jobs and American Power Act"), a 959-page climate bill offered by the Committee's Chair, Senator Barbara Boxer. Democrats on the EPW Committee had filed 80 amendments, but did not offer them because the Republican members refused to provide a quorum for their consideration unless the Environmental Protection Agency (EPA) first prepared a new, comprehensive economic analysis of the bill. Nor did the Republicans participate in the Committee vote. The final tally was 11-1, with the "no" coming from a key Democrat, Senator Max Baucus, who also is Chair of the Senate Finance Committee. Although the bill may provide a starting point, it currently does not appear to enjoy widespread Senate support, even among Democrats.

S. 1733 includes provisions on energy efficiency, water, renewable energy, nuclear policy, green jobs, worker transition, transportation, adaptation, and a variety of other issues, but its focus is climate. Even so, the bill tackles neither regulation of carbon markets nor international trade and has a much narrower scope than H.R. 2454, the climate and energy bill that the full House of Representatives barely passed last summer (known as the "Waxman-Markey" bill and as the "American Clean Energy and Security Act").1

At their cores, the two bills take a similar approach on climate. The Clean Air Act (CAA) would be substantially expanded to include a mandatory "cap-and-trade" program limiting greenhouse gas (GHG) emissions from large downstream sources and from upstream fossil fuel suppliers. While neither bill is truly economy-wide, their ultimate goals are to reduce the quantity of "United States" GHG emissions by the year 2050 at least 83 percent compared to 2005 levels.

In one of the more significant differences between the two, Kerry-Boxer is much more stringent in requiring at least a 20 percent reduction from 2020 to 2030, as compared to 17 percent under H.R. 2454. Beyond that, the total Kerry-Boxer allowance pool would be smaller from 2017 to 2029.

Both bills would start with a 3 percent reduction for certain sources in 2012. This aggressive short-term schedule likely would be especially challenging for many covered entities because few proven technologies for reducing GHG emissions currently are available and because detailed compliance plans could not be developed until EPA issues the many implementing regulations required under the bills.

Once the caps take effect, each year covered entities would need to hold emission allowances or offset credits for the carbon dioxide equivalent GHGs attributed to their operations. In the early years of the program, both Kerry-Boxer and Waxman-Markey would distribute to covered entities a portion of the necessary allowances free of charge. Allowances also would be earmarked to fund a host of climate-related programs.

In a major departure from H.R. 2454, S. 1733 would set aside a far larger percentage of allowances. Most of those allowances would go for deficit reduction (i.e., make the bill budget neutral); others would be used to support transportation, reductions in industrial emissions, forestry, renewables, and international adaptation, among other things. This large cut "off the top"— approximately 16 percent of the total allowance pool annually over just the first 10 years of the program—means that far fewer allowances would be available for free distribution than under Waxman-Markey, which raises potential concerns about the costs to covered entities.

To make up the differences between their emission levels and the number of allowances that may be distributed free of charge, covered entities could buy additional allowances from other holders or at a government-run auction. Both S. 1733 and H.R. 2454 would set a minimum allowance auction price for 2012 of $10.00 (in 2005 dollars for Kerry-Boxer and 2009 dollars for Waxman-Markey), which then would increase annually thereafter by 5 percent plus inflation (except that some allowances would be put aside for sale at an "average auction price" for small refiners "compliance").

Moreover, the bills would establish reserves (referred to as a "Market Stability Reserve" in S. 1733 and a "Strategic Reserve" in H.R. 2454) that could be auctioned only to covered entities at a "minimum" or "floor" price. The 2012 floor price in both bills would be $28.00, but from there the approaches differ. In the House bill, the 2013-2014 price (in 2009 dollars) would increase annually by 5 percent plus inflation; thereafter, the price would be 60 percent above a 36-month average rolling price. In S. 1733, the price (in 2005 dollars) would grow from 2013 to 2017 at 5 percent annually and at 7 percent for 2018 and after. The purpose of the reserves is to provide price relief if the general allowance pool price surges. But many covered entities are seeking a ceiling as well as a floor, which together are often referred to as a "price collar," to obtain greater price certainty and protection against unexpected price increases.

Both Waxman-Markey and Kerry-Boxer would allow covered entities in aggregate to use up to 2 billion "offset credits" to satisfy part of their obligations to hold emission allowances. Offsets would result from projects that reduce, capture, or sequester GHG emissions and that are in addition to what otherwise would occur. H.R. 2454 would require those to be split evenly between domestic and international projects, while S. 1733 would allow use of up to three-fourths domestic and one-fourth international. Both give EPA some room to increase the percentage of international offsets allowed. Under the House bill, the Agriculture Department would be in charge of domestic forestry and agriculture offsets, and EPA would oversee the other domestic and the international offsets. S. 1733 would delegate administration of domestic offsets to the President, would give EPA authority over international offsets, and would create an Office of Offsets Integrity at the Justice Department.

The two bills do draw a key distinction between eligible offset projects. Under S. 1733, methane collection and combustion projects at coal mines and landfills, and the capture of emissions from oil and natural gas systems, could generate offsets. Until 2020, EPA would not be able to set performance standards for any such "uncapped" sources that did qualify as offsets. On the other hand, H.R. 2454 would require EPA to develop performance standards for certain uncapped stationary sources, which could include landfills, mines, and oil and natural gas systems. According to EPA, "allowing these sources as offset projects" under S. 1733, instead of subjecting them to performance standards, "would decrease allowance prices by 2% in all years."

Apart from adding the cap-and-trade programs, the bills would amend a variety of provisions in the existing CAA. States would be preempted from running their own cap-and-trade programs until 2017. Further, EPA could not use a GHG's effect on climate to set a national ambient air quality standard, to promulgate an "air toxics" standard, or to require states to prevent any endangerment to foreign countries. But while H.R. 2454 would exempt emitters of GHGs from the CAA's "new source review" and operating permit provisions, S. 1733 would amend the CAA's definition of "major emitting facility" to apply to large GHG emitters and to exclude small GHG emitters, which indicates that Kerry-Boxer expects the CAA's existing "command and control" scheme to cover GHGs in addition to the cap-and-trade program.

Both bills are set up to be permanent. Neither contains a clear "re-opening" or "trigger" mechanism that would force Congress to re-visit the new CAA provisions should the long-term cap-and-trade program prove ineffective, harm the economy, or have other unwanted effects.

Some Senators appear to view the EPW Committee's action on S. 1733 as a positive development that frees the bill from "partisan gridlock," while signaling to the countries at December's international climate negotiations in Copenhagen that the United States "is serious about moving climate change legislation." At the same time, several moderates have criticized the bill, especially its treatment of agriculture and coal, its aggressive "targets and timetables," and its potential impact on the economy. As one Senator has observed, then, it is "not the end of the process," rather it is "just the beginning" so "there's lots of time and lots of opportunity for everybody to engage."

Footnote

1. For more information about the Waxman-Markey bill, please see our July 15, 2009 Client Update "US House Adopts First-of-its-Kind Bill Combining Climate Change Cap-and-Trade with a Comprehensive Energy Program," available at http://www.mayerbrown.com/publications/article.asp?id=7263&nid=6.

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