United States: Kerry and Lieberman Introduce Much-Anticipated Climate Change Bill

With no Republican sponsors and a full Senate calendar, the climate change bill faces an uphill battle despite significant industry support.

On May 12, 2010, Senators John Kerry (D-MA) and Joseph Lieberman (I-CT) introduced the American Power Act, a comprehensive energy and climate change bill that would establish a federal cap-and-trade program for carbon dioxide and other greenhouse gases (GHGs) and provide numerous incentives for new energy development in the United States. The bill was introduced after months of delay and without any explicit bipartisan support. Senator Lindsey Graham (R-SC) participated extensively in the negotiations and drafting of the proposal, but stepped away from the proposal in April following the Gulf of Mexico oil spill and a dispute with U.S. Senate leadership regarding immigration reform.

Although the Kerry-Lieberman bill follows the same general format as other climate change proposals debated in the Senate, it differs in a number of important respects from the American Clean Energy and Security Act of 2009, sponsored by Representatives Henry Waxman (D-CA) and Edward Markey (D-MA), that narrowly passed the U.S. House of Representatives in June 2009. Further complicating the bill's prospects, any differences between the Senate and House proposals would need to be reconciled before the climate change bill could become law.

For more information on the Waxman-Markey bill, see " Waxman-Markey American Clean Energy and Security Act Passes House ."

For more information on the Kerry-Boxer bill, see " Senators Kerry and Boxer Unveil Climate Bill ."

Emissions Targets

The bill seeks to reduce GHG emissions by 17 percent below 2005 levels by 2020, 58 percent below 2005 levels by 2030 and 83 percent below 2005 levels by 2050. These reduction levels match the short- and long-term reductions called for in the Waxman-Markey bill (17 percent below 2005 levels by 2020, and 83 percent below 2005 levels by 2050), and closely track previous commitments and targets discussed by the administration in connection with the Copenhagen convention. Sources of electricity, refineries, large industrial facilities that emit 25,000 tons or more of carbon dioxide equivalent GHGs per year, natural gas local distribution companies, geologic sequestration sites, and various enumerated categories of chemical and industrial facilities will be "covered entities" under the program. The cap initially applies primarily to electric generators. Large industrial facilities and natural gas local distribution companies will be subject to in the cap-and-trade program starting in 2016. The transportation sector, which includes refineries and transportation fuel terminals, will be subject to regulation under a separate program.

Regulation of Carbon Markets

Covered entities will be able to satisfy the new compliance obligation by submitting tradable emissions allowances. In response to political opposition to establishing a national GHG emissions market, the bill provides the U.S. Commodity Futures Trading Commission (CFTC) with significant new powers to regulate allowances and related derivatives products. For example, the Kerry-Lieberman bill would require all GHG products to be traded on an exchange and cleared through a "greenhouse gas clearing organization." The bill also contains strict market participation rules, limiting access to the cash market for greenhouse gas instruments to entities that are either subject to a compliance obligation under the bill or otherwise registered with the CFTC as a "regulated greenhouse gas market participant." Although allowances will be initially distributed through a competitive auction process, the price of GHG allowances will be subject to a hard-price collar, with a $12 floor (increased by inflation plus 3 percent per year) and $25 ceiling (increased by inflation plus 5 percent per year). Greenhouse gas instruments that are traded on a regulated futures exchange or that do not provide for physical delivery could be held and traded by any entity.

State Cap-and-Trade Programs

The Kerry-Lieberman bill would permanently prohibit states from implementing or enforcing cap-and-trade programs to limit GHGs. As a result, this provision would effectively dissolve state and regional programs like the Regional Greenhouse Gas Initiative, the Midwestern Greenhouse Gas Reduction Accord and the Western Climate Initiative. As currently drafted, the bill would provide compensation for states that have cap-and-trade programs that will be eliminated.

In contrast, the Waxman-Markey proposal would have preempted state and regional programs for a period of only five years. After the five-year moratorium was lifted, state and regional coalitions could develop regulations that either paralleled or surpassed the federal standard.

EPA Regulation of GHGs

Similar to the Waxman-Markey proposal, the Kerry-Lieberman bill would substantially limit the U.S. Environmental Protection Agency's (EPA) authority to regulate GHGs under its existing statutory authority. Under the current draft, the EPA would be expressly prohibited from regulating GHGs under the provisions of the Clean Air Act that address hazardous air pollutants, criteria pollutants, international air pollution and most aspects of new source review. In effect, the EPA's much discussed "endangerment finding" would be reversed. Coal-fired power plants permitted in 2009 and after would, however, be subject to new GHG performance standards.

Renewable Energy, Nuclear Energy and Other Incentives

Unlike the Waxman-Markey bill, the Kerry-Lieberman bill does not establish a mandatory or voluntary federal renewable portfolio standard. Instead, it provides financial assistance to state renewable energy programs in the form of emissions allowances. Many members of the renewable energy industry are disappointed that this comparatively non-controversial provision did not make it into the discussion draft.

The Kerry-Lieberman bill provides the nuclear power industry with substantial tax credits, loan guarantees and risk protection. The proposed tax incentives would provide nuclear generators with financial benefits that are essentially comparable to those enjoyed by renewable energy producers for the past several years.

Clean coal, oil and natural gas also receive targeted incentives, ranging from funding for new carbon capture and sequestration projects to new opportunities for offshore oil and natural gas drilling.

Hydraulic Fracturing

In response to increased state and federal scrutiny of hydraulic fracturing of shale and the development of other unconventional natural gas resources, the Kerry-Lieberman bill would require disclosure of all chemical constituents used in a hydraulic fracturing operation. This provision would subject hydraulic fracturing to new reporting requirements, but is less far-reaching than other proposals which would eliminate the exemption for "fracking" that currently exists in the Safe Drinking Water Act. Hydraulic fracturing is regulated extensively by state environmental agencies.

Conclusion

The Kerry-Lieberman bill is only in discussion draft form, and its authors have stressed that it is meant to serve as a platform for further negotiation. Nevertheless, it remains unclear whether the proposed bill will be able to garner enough votes in the Senate. If there is not enough support for the bill, Senate Majority Leader Harry Reid (D-NV) has indicated that he may opt for a smaller and less ambitious energy bill, which will likely track the energy bill sponsored by Senator Jeff Bingaman (D-NM) that was approved by the U.S. Senate Committee on Energy and Natural Resources in June 2009. The Bingaman bill would establish a new federal renewable portfolio standard, but does not directly address GHG emissions through a cap-and-trade or similar program.

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.

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