On May 12, 2010, Senators Kerry and Lieberman released their long awaited climate and energy security bill, the American Power Act Bill. Senator Lindsay Graham was a co-sponsor of this bill prior to withdrawing his participation a few weeks ago, primarily for political reasons not related to the content of the bill. Last week, Graham cited the Gulf oil spill as another reason not to move ahead with the bill at this time. Notwithstanding this, the bill has now been released for review by the Senate. The bill will need 60 votes in order to pass in the Senate, which will be difficult to muster without the support of all 59 Democrat senators and at least one Republican senator. Support by some Democrat senators for a climate and energy bill has been in question due to the potential impact of the bill on certain coal state economies and states opposing offshore drilling. However, the draft bill attempts to address some of these issues.
Highlights of the Bill
Since Canada's federal government has stated that it will follow the path of the U.S. in crafting its climate legislation, including the inclusion and design of a cap and trade system or similar market mechanism for reducing greenhouse gas ("GHG") emissions, the American Power Act Bill will have a major impact on Canada if it passes. The provisions highlighted here pertain largely to those that will most directly impact Canadian business and Canada's future climate change legislation.
The bill calls for reductions in greenhouse gas emissions from covered entities from 2005 levels as follows:
- 4.75% by 2013
- 17% by 2020
- 58% by 2030
- 83% by 2050
The covered entities are large stationary sources in certain sectors, emitting more than 25,000 tonnes of CO2e annually. (Note that this is significantly lower than the current Alberta threshold of 100,000 tonnes and the previously proposed federal threshold of 50,000 tonnes.) It is estimated this threshold will mean the program will apply to 7,500 factories and power plants. The emissions reduction requirements will begin with utilities in 2013 and manufacturing will commence in 2016. Producers and importers of fuels will be subject to an emissions cap, but will not be part of the cap and trade carbon market. Instead, they will be required to purchase allowances at a fixed price on a quarterly basis that have been set aside for them. It is not clear what the "fixed price" will be, but it is expected to be based on the price established by the auctions. The EPA will be required to continue regulating the reduction of emissions from transportation.
Cap and Trade System
The bill provides for capping of emissions from the utilities and manufacturing sectors with the distribution of allowances for these sectors equivalent to the number of tonnes of GHG emissions allowed for each year. It is not certain what portion of allowances will be auctioned and what portion will be given away for free to emitters. However, allowances will be given away free to certain energy-intensive and trade exposed industries to offset their cost of compliance and allow them to remain competitive while rewarding efficiency investments. The upstream oil and gas sector will not be part of the carbon market, but as mentioned above, producers and importers of refined fuel products will be required to purchase allowances.
The bill also provides that states will no longer have the jurisdiction to legislate their own cap and trade programs and that any such programs will be replaced by the provisions of this bill. Notwithstanding this restriction, states can still enforce stricter targets for emission reductions than are contained in the bill.
Offsets will be included in the cap and trade system and will be generated from eligible projects primarily in agricultural, grassland and rangeland management and sequestration practices, forestry activities and land use changes, and capture of fugitive methane emissions from coal mines, landfills and oil and gas distribution facilities.
The bill establishes a floor and ceiling price for allowances of $12.00 and $25.00, respectively, beginning in 2013 with a provision for an annual increase of 3% on the floor and 5% on the ceiling, plus inflation.
The bill provides for a border adjustment mechanism that will require imports from countries that have not taken action to limit emissions to be subject to an adjustment amount at the border to prevent carbon leakage. Presumably, this will also apply where an exporting country's emission reduction standards are not as stringent as those in the U.S. This is one of the reasons that the Government of Canada has been waiting to introduce its climate change legislation, which will have to be at least as stringent as that of the U.S. to avoid this tariff.
To mitigate market manipulation and volatility, only entities with compliance obligations and a limited number of market makers will be allowed to participate in the auctions and the primary cash market. Jurisdiction over trading of greenhouse gas instruments will be under the Commodity Futures Trading Commission and offexchange trades of futures instruments will be prohibited. Trading of greenhouse gas instruments on the secondary market will be restricted to trading conducted on an exchange and cleared through a greenhouse gas clearing agency. Only regulated greenhouse gas market participants will be allowed to trade and real time publication of trading information will be required.
Carbon Capture and Sequestration
The bill calls for the creation of special funding programs to provide incentives to encourage research and development of CCS technologies and will provide allowances for commercial CCS deployment projects based on the volume of CO2e permanently sequestered.
Agricultural Soil Sequestration
Farmers will be exempt from the obligation to reduce GHG emissions but will be allowed to participate in the offset program by reducing emissions in their farming operations. This is expected to be a multi-billion dollar revenue source to farmers and a key source of offsets for the offset system.
Clean Energy and Nuclear
There are a number of financial incentives and funding sources for research, development and deployment of clean energy and nuclear projects, including tax incentives, accelerated depreciation and loan guarantees. Pilot projects for the use of electric-powered heavy and light-duty vehicles and incentives for the use of cleaner natural gas in heavy-duty vehicle fleets are also contemplated in the bill.
Offshore drilling was initially added to this bill as a political compromise to gain support from certain senators for the bill. The bill recognizes that offshore drilling is required to achieve greater energy independence during the transition period to clean energy. After the recent Gulf oil spill, the bill was changed to address the related environmental issues that became front and centre. The bill still contemplates an expansion in offshore drilling, but not until investigations have been completed and safeguards put in place to ensure that a spill like the Deep Horizon accident does not happen again. The bill provides for the right of coastal states to opt-out of drilling up to 75 miles from their shores. Nearby states can veto drilling if they stand to suffer significant adverse impacts in the event of an accident. It will be interesting to see how nearby a state has to be to veto drilling based on the fear of a major oil spill (which is now and likely always has been, reasonably foreseeable). At the same time, coastal states that do allow drilling will receive 37.5% of lease and royalty revenues. 12.5% of federal royalties will also be directed to a land and water conservation fund.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.