In a much anticipated development, the powerful Committee on Energy and Commerce of the United States House of Representatives approved the American Clean Energy and Security Act of 2009 on May 21, 2009. This comprehensive legislation promotes the development of clean energy resources, seeks to increase energy efficiency, mandates cuts in greenhouse gases and attempts to transition the United States into what the Committee heralds as a "clean energy economy."
While attention has focused on the "cap-and-trade" features of the legislation, there are additional provisions of the 932-page bill that, if enacted into law, will be of interest to a wide range of enterprises including: electric utilities, construction companies, lighting and appliance manufacturers, vehicle producers, chemical companies, investment banks, brokerage firms and investment funds.
Although the legislation remains subject to review by at least eight other House committees and will no doubt be altered as it is considered by members of the House and the U.S. Senate, the bill offers important insights into how the debate over climate change is evolving under the Obama Administration and the Democratic-controlled Congress.
Significant provisions of the American Clean Energy and Security Act of 2009 (Act) include the following:
The Act places limits on emissions of heat-trapping pollutants. The greenhouse gases regulated under this title include: carbon dioxide, methane, nitrous oxide and hydrofluorocarbons (HFCs) emitted as by-product.
Global Warming Pollution Reduction Program: Establishes a "cap-and trade" system to control greenhouse gas emissions, setting a declining limit on global warming pollution. The legislation directs the EPA Administrator to issue regulations to reduce emissions of covered sources to 97% of 2005 levels by 2012, 83% by 2020, 58% by 2030 and 17% by 2050.
Allowances: Covered entities will be issued tradable federal permits, called "allowances," equal to the tonnage limit on greenhouse gas emissions for each year (with one allowance representing permission to emit one ton of greenhouse gases, measured in tons of carbon dioxide equivalent). Covered entities include electric utilities, oil companies and large industrial sources. Available allowances will be reduced each year. The program prohibits covered entities from emitting or having attributable greenhouse gases in excess of their allowable emissions level, determined by the number of emission allowances and offset credits they have.
There are steep financial consequences for failure to comply with allowable emissions, calculated by multiplying the excess tons of carbon dioxide equivalent emitted by twice the fair market value of emission allowances.
Allowances can be banked for use during future compliances years, with some restrictions. In addition, there is a two-year rolling compliance period which allows covered entities to borrow an unlimited number of allowances from one year ahead.
During the early years of the legislation, the bill provides for aid to some energy sectors in the form of free allowances. Approximately 15% of the allowances are earmarked for companies in energy-intensive and internationally competitive industries, including the chemical industry, and roughly 50% to fossil-fuel-dependent energy providers.
Electricity generators, liquid fuel refiners and importers, and fluorinated gas manufacturers are covered by the cap-and-trade program starting in 2012. Industrial sources that emit more than 25,000 tons of carbon dioxide equivalent per year are covered starting in 2014 and local distribution companies that deliver natural gas are covered starting in 2016.
Offsets: Covered entities would be allowed to increase emissions above their allowance if they could obtain offsets from other sources. The total quantity of offsets allowed in any year could not exceed 2 billion tons of emissions by using domestic and international offset credits, split evenly between international and domestic offsets. Offsets will be used to fund projects that reduce carbon emissions, such as reforestation.
Carbon Market Assurance And Oversight: Once issued, allowances can be traded, banked and borrowed. Provisions in the Act provide for oversight and regulation of the new markets for carbon allowances and offsets, aiming for market transparency and liquidity, and allowing trading in carbon allowance futures. The Federal Energy Regulatory Commission is charged with regulating the allowance and offset markets, while the Commodity Futures Trading Commission would regulate allowance derivative markets.
The Act promotes renewable sources of energy, carbon capture and sequestration technologies, clean electric vehicles and the smart grid and electricity transmission.
Renewable Energy: Requires retail electricity suppliers to meet a certain percentage of their load with electricity generated from renewable resources including wind, biomass, solar and geothermal. A supplier's requirement is reduced in proportion to any portion of its electricity sales that is generated from certain existing hydroelectric facilities, new nuclear generating units and fossil-fuelled units that capture and geologically sequester greenhouse gas emissions.
Carbon Capture And Sequestration: Promotes the development of carbon capture and sequestration (CCS) technologies to ensure a continuing place for coal, which generates approximately 49% of electricity in the United States. CCS is a method of reducing global warming pollution by capturing and injecting underground the carbon dioxide emitted from electricity generation plants utilizing fossil fuels.
Clean Transportation: Authorizes financial support for the deployment of electric vehicles and for retooling existing factories for the manufacture of electric vehicles.
Smart Grid Advancement: Promotes the modernization of the electric grid with the introduction of more efficient "smart grid" technologies, including measures to reduce peak electric demand.
The Act focuses on increasing energy efficiency across all sectors of the economy, including buildings, appliances, transportation and industry.
Building Energy Efficiency: Funds state and local adoption of energy-efficient building codes and the retrofitting of existing buildings.
Lighting and Appliance Energy Efficiency Programs: Establishes efficiency standards for lighting and appliances.
Transportation Efficiency: Directs government agencies to harmonize fuel economy and emission standards across the United States as a means of simplifying compliance by auto manufacturers, and requires states to establish goals for greenhouse gas reductions by the transportation sector.
Industrial Energy Efficiency: Requires the Secretary of Energy to establish standards for industrial energy efficiency.
The Act aims to protect U.S. consumers and industry and promote green jobs during the transition to a "clean energy economy."
Emission Allowance Rebate Program: Compensates entities for costs incurred as a result of complying with pollution limits to ensure that U.S. manufacturers are not at a disadvantage relative to international competitors.
Green Jobs And Worker Transition: Authorizes grants to educational institutions to develop programs that prepare students for careers in renewable energy, energy efficiency and global warming mitigation. Also establishes programs to compensate workers displaced as a result of the legislation.
Exporting Clean Technology: Encourages widespread deployment of clean technologies to developing countries.
Adapting To Global Warming: Establishes programs to prepare and respond on domestic and international levels to the impacts of climate change, including its public health effects.
We will continue to monitor developments involving this landmark legislation and issue updates as events warrant.
Kevin Cramer is a partner in the Business Law Department of the firm's New York office where he practices U.S. M&A and securities law. Radha Curpen is a partner in the Litigation Department of Osler, Hoskin & Harcourt LLP. Kate Coolican is an associate in the Business Law Department of the firm's New York office.
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