The American Clean Energy and Security Act of 2009 (ACESA), which passed the U.S. House of Representatives on June 26, 2009, would affect all sectors of the economy and create both opportunities and challenges. House Bill 2454—popularly known as the Waxman-Markey bill—would require reductions of U.S. greenhouse gas emissions through a mix of regulatory and market-based initiatives and incentives. Senate passage remains uncertain, but President Obama is strongly committed to ACESA, and many regarded the House as the chamber less likely to approve climate legislation. (It did so narrowly, 219-212.)
Companies and organizations that would be affected significantly by ACESA should not await Senate action to begin planning. Companies that emit significant amounts of greenhouse gases or use significant amounts of fossil fuels now know that they will face new costs and can begin identifying opportunities to reduce emissions and any engineering or permit modifications that will be required. Many organizations may benefit from the opportunity to create offsets or to participate in trading and can begin planning to take advantage of those opportunities.
The overview that follows is intended as a road map to some of ACESA's most important provisions. The bill, committee report, and amendments exceed 1,200 pages and include detail and programs that cannot be covered here. Ballard Spahr has prepared a detailed outline of the bill, which we intend to make available in a subsequent legal alert and to update as the bill moves through the Senate and conference committee. If you have questions about ACESA, how it may affect your operations, or how to prepare for it, please feel free to contact Robert B. McKinstry, Jr., (215.864.8208, mckinstry@ballardspahr.com) or any member of Ballard Spahr's Climate Change and Sustainability Initiative.
Background
Greenhouse gas emissions affect the climate by accumulating and trapping heat within the earth's atmosphere. These emissions consist primarily of carbon dioxide. Carbon dioxide necessarily results when any carbon based material—particularly fossil fuel—burns. In addition, certain other gases have similar, indeed more potent, climate change effects, although they are emitted in much smaller quantities. For example, methane results from most forms of digestion (in cows, for example) or rotting of organic material (in a landfill, for example). ACESA follows most other programs by accounting for emissions of greenhouse gases in terms of carbon dioxide equivalents.
Enforceable Emissions Goals and Regulatory Program
The bill would establish enforceable greenhouse gas emissions reduction goals for the U.S. economy. The goals are intended to reflect the minimum reductions the scientific community agrees are necessary to prevent dangerous climate changes. The bill would use 2005 as a benchmark year for greenhouse gas emissions, calling for reductions of 3 percent by 2012, 20 percent by 2020, 42 percent by 2030, and 83 percent by 2050 (which is the international standard of 80 percent below 1990 levels). The targets may be adjusted by the U.S. Environmental Protection Agency (EPA), up or down, to reflect changes in knowledge. The bill requires periodic scientific assessments and reports to ensure that the goals remain meaningful.
ACESA would impose a complex regulatory program to achieve the reductions. The program centers on a cap-and-trade system that would impose decreasing caps limiting the total annual amounts of approximately 80 percent of U.S. greenhouse gas emissions, with the decreases roughly paralleling the bill’s reduction goals. However, the bill is not simply a cap-and-trade measure. It also calls for state planning programs to reduce emissions from transportation and land use and state and federal plans to help us adapt to changes in climate that will occur. The bill would create incentives and regulatory measures to encourage development of alternative electric generation, conservation, and energy efficiency. ACESA would also impose new regulation on the now relatively unregulated markets for trading of newly created carbon and renewable energy credits, futures, and derivatives. The planning programs would not displace local land use regulation, but might well substantially influence it.
Cap-and-Trade System Overview
In the cap-and-trade system, the government would create and distribute "allowances" equal to the number of tons of emissions of carbon dioxide equivalents allowed under the cap. Each allowance represents a ton of carbon dioxide equivalent emissions. Each regulated party would be required to obtain (either through government allocation, purchase at auction, or trades with other allowance holders) and surrender to the government a number of allowances equal to its emissions tonnage each year. If a party could not acquire sufficient allowances or reduce its emissions to the number of allowances it has acquired, the party would face regulatory penalties. This federal cap-and-trade scheme would temporarily preempt existing state and regional schemes.
ACESA's cap-and-trade provisions would take effect in three phases, covering electrical generation units in 2012, industrial sources in 2014, and natural gas and local fossil fuel distribution in 2016. The electric generation and industrial sources would be regulated at the point of emissions (smokestack); each regulated entity would be required to acquire and surrender to the government a number of allowances equal to its emissions for the accounting period. The third phase of regulation would apply "upstream" to the distributors of fossil fuel; distributors would have to obtain allowances equal to the carbon dioxide emissions that would be created by use of the fuel they sell to parties other than the utility and industrial sources already subject to the cap. For example, oil companies would have to obtain allowances to equal the calculated emissions from automobiles using the gasoline they sell.
Regulatory Flexibility
ACESA includes numerous provisions that would offer some regulatory flexibility. For example, the bill would allow banking of allowances that are unused and limited borrowing of allowances from future periods. It would also allow averaging allowances over several years.
ACESA provides for the creation of some allowances through the creation of "offsets." Offsets are created either by reducing greenhouse gas emissions in areas that are unregulated or by "sequestering" carbon dioxide in relatively permanent form, as can occur in soils or forests. ACESA would allocate a limited number of allowances to use for offsets, with accounts for agriculture, forestry, and international sources. Rules would be required for generating, measuring, and monitoring these offsets.
Allocation of Allowances
All of this begs the question of who gets how many of the allowances in the first place. The bill would award most allowances for free initially and would distribute only a small percentage through an auction. ACESA would eventually increase the percentage distributed at auction to 85 percent.
Notably, however, under ACESA many of the allowances awarded for free would not be given to emitters, who would still need to purchase all or a significant number of allowances in the open market from those who are awarded the allowances. For example, allowances for fossil fuel-fired electric generators in states subject to traditional utility regulation of generation would be awarded to the distribution company for the benefit of the consumers; those allowances would be sold and the generation companies would likely need to purchase them where they utilize fossil fuel generation. The generation companies would certainly need to factor in the cost or value of necessary allowances in deciding what new sources of generation to build. Many allowances would be distributed to accounts to fund or encourage certain activities, including, among other things, offset creation, adaptation, international cooperation, prevention of economic dislocation, and land use and transportation planning for emissions reduction. These allowances, also would be sold, so the regulated generators would need to buy them or reduce emissions. Of course, under this scheme, states, foundations, and conservation groups could acquire and retire allowances, effectively lowering the cap.
Role of the Clean Air Act
ACESA would alleviate some of the concern presented by efforts to regulate greenhouse gases under the more conventional provisions of the Clean Air Act employed to address other air pollutants. The cap-and-trade provisions would be enforced and implemented under the Clean Air Act by the EPA. ACESA also would require the EPA to use existing Clean Air Act authority to develop standards limiting emissions from certain regulated sources not covered by the cap-and-trade program. The bill would leave states as free to enact more stringent greenhouse gas emissions standards as does the current law. ACESA would provide that greenhouse gases should not be listed as criteria pollutants nor should they be subject to National Ambient Air Quality Standards. The legislation would exempt greenhouse gas sources that would not otherwise be major stationary sources of other pollutants from the requirements of the EPA's new source review program – that is, the bill would allay the fear that space heating boilers for modest buildings would be subject to regulatory controls as major stationary sources under the Clean Air Act. On the other hand, the bill would make clear that states may enact efficiency codes for whole buildings, notwithstanding the federal preemption of state appliance standards.
Incentives and RPS
ACESA would also create a series of incentives for energy efficiency, smart grids, and alternative energy sources. It would create a new national renewable portfolio standard requiring covered utilities to generate 6 percent of their capacity from renewable sources or energy efficiency savings by 2012, increasing the percentage by roughly 3 percent a year until 2021, when utilities would be required to produce 20 percent of their electricity from renewables and demonstrated energy efficiency. This standard would not preempt more stringent state RPS standards, and states would be permitted to require utilities to retire federal renewable energy credits received in excess of the federal standard. The bill also includes a number of tax and funding incentives for renewable energy, energy efficiency, smart grid improvements, transportation programs, and programs to capture and sequester greenhouse gas emissions.
Credit Trading Markets, Regulation
Finally, ACESA would establish a new regulatory program for the carbon credit and renewable energy credit trading markets. The bill would vest power in the Federal Energy Regulatory Commission and the U.S. Commodity Futures Trading Commission to regulate carbon emissions allowances and offset credits and renewable energy credits created under ACESA. The program would leave states free to regulate more stringently.
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