Who Gives A Waxman-Markey?

Key Points:
If passed into law, the American Clean Energy and Security Bill 2009 will create the largest carbon market in the world starting in 2012 and provide additional impetus to clean energy, energy efficiency and emissions offset programs.

We all should. After a decade of inaction, the US is now on the cusp of establishing the largest carbon market in the world, with the recent passage through the US House of Representatives of the American Clean Energy and Security Bill 2009, otherwise known as the Waxman-Markey Bill. The House of Representatives passed the Bill by a vote of 219-212 on June 28, 2009.

The pace at which events have moved in the US has been truly remarkable, confounding even informed commentators. Only in May at Carbon Expo in Barcelona, Democrat and Republican political advisers were expressing generally uniform opinions that the US House of Representatives might pass the Waxman-Markey Bill before the end of the year, with a Senate vote likely to occur in the second quarter of 2010 at the earliest. Now, there is a real possibility that the Bill could be voted on by the Senate in the weeks leading up to the next UNFCCC conference in Copenhagen in December 2009. There is a distinct possibility that the US will pass its own cap and trade legislation before the Australian Parliament passes the CPRS Bill.

Overview

The Bill is a weighty tome, comprising over 1,400 pages. It not only contains the framework for a US emissions trading scheme based on a cap and trade model similar to Australia's CPRS, it also covers related areas including clean energy, energy efficiency, transitioning to a clean energy economy and adaptation to climate change.

The Bill contains the following key provisions:

• requires electric utilities to meet 20 percent of their electricity demand through renewable energy sources and energy efficiency by 2020
• invests $190 billion in new clean energy technologies and energy efficiency, including energy efficiency and renewable energy ($90 billion in new investments by 2025), carbon capture and sequestration ($60 billion), electric and other advanced technology vehicles ($20 billion), and basic scientific research and development ($20 billion)
• mandates new energy-saving standards for buildings, appliances, and industry
• reduces carbon emissions from major US sources by 17 percent by 2020 and over 80 percent by 2050 compared to 2005 levels. Complementary measures in the legislation, such as investments in preventing tropical deforestation, will achieve significant additional reductions in carbon emissions.
• protects consumers from energy price increases. According to recent analyses from the Congressional Budget Office and the Environmental Protection Agency, the legislation will cost each household less than 50 cents per day in 2020 (not including energy efficiency savings).

Cap and trade scheme

Below is an overview of some of the key elements of the ETS proposed in the Bill:

Coverage:

• Seven greenhouse gases CO₂, CH₄, HFCs, NF₃, N₂0, PFCs, and SF₆.
• Phases in prohibitions against covered entities (which include stationary sources emitting more than 25,000 tons CO₂-e per annum, producers and importers of petroleum fuels, residential and commercial sellers of natural gas, and other specified sources) from exceeding allowable emission levels.

Caps:

• Requires the Administrator to establish specified emission allowances (annual tonnage limits) for 2012-2049, and 2050 and thereafter.
• Prohibits States from implementing any cap and trade programs that covers any capped emissions emitted between 2012 and 2017.
• Reduction targets (based on 2005 levels):
• • 3 percent by 2012
  • 17 percent by 2020
  • 42 percent by 2030
  • 83 percent by 2050.

Allocation:

• Specifies a percentage allocation of various vintage years of the total number of allowances to electricity consumers, natural gas consumers, energy intensive - trade exposed entities and to facilitate the deployment of carbon capture and storage technology, investment in energy efficiency and renewable energy, investment in clean vehicle technology, adaptation and research. It is estimated that approximately 80 percent of allowances will be issued for free initially, with that number declining over time.
• Auction of specified percentage from each vintage year with proceeds to benefit low income consumers and investment in green jobs. Auction of certain unused allowances, initially to be used to fund rebates to consumers.
• Provides for trading, banking and borrowing, auctioning, selling , exchanging, transferring, holding and retiring of emission allowances.

Offsets:

• Domestic and international offsets allowed. Projects will be approved by the Administrator on the basis of recommendations from the Offsets Integrity Advisory Board.
• Offsets equivalent to two billion tonnes of emissions can be used for compliance (generally half domestic and half international).
• One domestic offset or 1.25 international offset credits must be submitted for every one tonne of emissions, although up until 2018, one international offset credit can be used.
• Avoided tropical deforestation projects will be recognised as capable of generating offsets for compliance use. This is likely to provide significant support to REDD projects internationally.

Prices and penalties:

• Strategic reserve of 2.5 billion allowances to be created by setting aside a small number of allowances to be issued each year (1-3 percent), to be made available through auction if allowance prices rise to unexpectedly high levels.
• An excess emissions penalty is payable for non-compliance equivalent to the amount of excess emissions (ie. the emissions in respect of which no offset or allowance was held) multiplied by twice the clearing price for the earliest vintage at the last auction.
• There is also a "make good" obligation which means that the covered entity is still obliged to surrender allowances or offsets for the excess emissions in the following calendar year.

Agricultural offsets program

One of the interesting elements of the Bill concerns the role for agricultural offsets which is likely to significantly boost the US domestic offset market. The Bill allows covered entities to use up to one billion domestic offset credits annually to meet scheme obligations.

As part of the deal to secure passage through the House of Representatives, the US Department of Agriculture was given responsibility for managing the agricultural offsets program. Since responsibility for the development of the program (including eligible practice types and methodologies) rests with the Secretary of the USDA, it is considered that the USDA will be more receptive to soil-based sequestration than the US EPA might be, meaning that there will be a greater chance that the domestic offset market will be able to supply the one billion tonnes of domestic offsets to be used for compliance.

The domestic agricultural offset scheme has been estimated to be worth US$4 billion a year by 2030, generating significant revenue for farmers. These projects, however, will only be able to generate projects for a limited crediting periods - for example agricultural sequestration practices will have a five year crediting period, after which the offset project will need to re-enrol.

The current CPRS design defers until 2013 any decision on the agricultural sector generating emissions offsets for compliance purposes, at which time a decision will be made whether that sector is included in the CPRS or not.

Border adjustment program

An issue with potentially broad ramifications is the Bill's creation of what is effectively a tariff on the import of goods into the US from countries which do not have carbon constraints equivalent to those established by the Bill. Under the border adjustment program, foreign manufacturers and importers would be required to pay for allowances to cover carbon contained in products imported into the US, if the President considers that certain trade exposed industries in the US are not adequately compensated for the additional costs incurred under the ETS.

While President Obama has signalled that he does not support the inclusion of this provision in the Bill nor will he use the authority granted to him under that provision, it obviously brings to the fore the debate over emission reduction commitments expected from countries such as China and India in the current UNFCCC negotiations leading up to Copenhagen. China has recently criticised the provision as violating the rules of the World Trade Organisation.

Implications for Australia

Already, the passage of the Bill has been used by both sides of the political debate in Australia as justification for their particular stance. The Government has relied on the passage of the Bill to justify the need to pass the CPRS Bill before the Copenhagen conference. The Opposition has used it to advocate for greater allocation of free permits to EITE sectors and stationary energy, as well as for the large Australian agricultural sector to be given a role in the generation of offsets for compliance purposes.

Clearly, if the Waxman-Markey Bill is passed by the Senate, the commencement of the US ETS in 2012 will have significant ramifications for Australia, particularly in the international offset market. If credits from Kyoto Protocol flexible mechanisms such as CDM and JI projects, or any revised project programs post-2012, are approved for use in the US market, there is likely to be significant competition for the available credits internationally. While the CPRS allows unlimited use of Kyoto credits and other eligible international emission units to meet scheme obligations, Australian buyers may end up being squeezed by EU and US compliance buyers.

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