EfficiencyLaw.com

In 2009, federal climate legislation stalled in the wake of economic downturn, health care reform, and the failure to reach an internationally binding agreement in Copenhagen. The unexpected loss of a Democratic Senate seat in January further weakened the prospects of enacting federal legislation this year. Recognizing that significant compromises in the content and scope of climate legislation will likely be required to pass a bill in 2010, proponents of climate legislation in the Senate have begun to explore alternatives to the economy-wide cap-and-trade model. These proposals include a cap-and-dividend scheme, a stand-alone energy bill, or a hybrid scheme combining one or more alternatives. Details on the policy shift, including recent Senate activity, are provided below.

Comprehensive Cap-and-Trade Climate Legislation: Still Viable but Unlikely

Economy-wide cap-and-trade is the centerpiece of the House-approved American Clean Energy and Security Act of 2009 (H.R. 2454, also known as the Waxman-Markey bill). The bill would initially target large stationary sources (> 25,000 mtCO2e), with smaller sources gradually phased-in as EPA lowers the emissions threshold. Uncapped sources would be subject to potential EPA regulation under Clean Air Act (CAA) Section 111 (New Source Performance Standards), but the bill would prohibit EPA from regulating GHGs under other key CAA programs (e.g., PSD and Title V). The bill would also require the development of industrial energy efficiency standards.

Although Waxman-Markey has been superseded by negotiations in the Senate, it has served, and will likely continue to serve, as a point of reference for future Senate work. For example, the Clean Energy Jobs and American Power Act (S. 1733, also known as the Kerry-Boxer bill) was modeled on the provisions of Waxman-Markey with several key modifications, including a slightly more stringent cap and the retention of EPA’s authority to regulate GHGs under the PSD and Title V programs. Strong opposition to EPA’s use of revised modeling in its economic impact analysis led Republicans to boycott the mark-up while it was in Committee, preventing formal debate and the consideration of amendments. As a result, the bill was generally considered dead on arrival in the Senate.

Despite these setbacks and the recent policy shift toward alternative climate measures (see below), a core group of industry and environmental groups continue to support economy-wide cap-and-trade. Edison Electric Institute and several of its member companies, for example, are advocating for an economy-wide approach.

Patchwork of Emerging Climate Policy Alternatives

In Fall 2009, Senators Kerry, Graham, and Lieberman initiated “dual track” negotiations involving industry groups and the White House in the development of bipartisan climate legislation. The Senators have thus far declined to release a framework for the legislation, a desire to “keep everything on the table.” Although the Senators initially appeared in favor of an economy-wide cap-and-trade system, recent statements indicate they may abandon cap-and-trade in favor of a hybrid approach that combines cap-and-dividend (see discussion of CLEAR below) with cap-and-trade for certain sectors. In order to garner the necessary 60 votes in the Senate, the bill is expected to feature significant compromises on incentives for nuclear power and expanded oil and gas drilling. The effort has already earned the support of the U.S. Chamber of Commerce, which is widely perceived as a leading critic of climate legislation.

A second bipartisan initiative in the Senate, the Carbon Limits and Energy for America’s Renewal (CLEAR) Act, is receiving an unexpected amount of support for its “cap and dividend” proposal. Under this approach, fossil fuel refineries and importers would be required to purchase “carbon shares” for each ton of carbon sold. 75% of the revenues would be refunded directly to U.S. residents through tax-exempt monthly dividends. The remaining 25% would fund energy technology research and development, adaptation, and assistance for energy-intensive and trade-sensitive sectors. Notably, only covered entities would be authorized to participate in trading (i.e., there would be no external market). According to Senators Cantwell and Collins, this feature is designed to avoid the creation of a new speculative commodity market that may cause volatile price spikes and harm to consumers and the economy. Over 40 companies and organizations have announced plans to lobby on the bill.

It is also possible that the Senate will pass an energy bill in lieu of, or perhaps in combination with, comprehensive climate legislation. Senator Graham recently circulated a draft stand-alone energy bill that would mandate “clean energy” production targets over the next 15 years. New nuclear facilities and coal-fired power plants that sequester a minimum of 65% of GHG emissions, as well as traditional renewable power sources such as wind and solar, would qualify as clean energy under the bill. Although Kerry and Lieberman have reviewed Graham’s draft bill, they have not yet agreed to include it in the comprehensive package. Others Senators are considering whether to revive the American Clean Energy Leadership Act (S. 1462, also known as the Bingaman Energy Bill), which passed the House Energy and Natural Resources Committee in June 2009.

Other alternatives under consideration include an electric utility sector cap on GHG emissions (Voinovich and Lugar), a carbon tax (Dorgan, Murkowski, and Corker), and a bill that would reduce emissions by doubling nuclear power production and promoting development of carbon capture and storage, biofuels, and solar technologies (Alexander and Webb). While these alternatives are not likely to be politically viable on their own, Senators Kerry, Graham and Lieberman may incorporate certain elements into the bipartisan bill they ultimately introduce. The Senators have also initiated discussions with Senators Cantwell and Collins, reflecting the possibility of a merger of the CLEAR Act and the bipartisan bill.