Climate policy is about to meet it's true test: the meatgrinder known as the U.S. Senate. Senator Barbara Boxer and John Kerry introduced a discussion draft climate bill today, and the following is a summary of key features of the bill and notable differences from it's House sibling, the Waxman-Markey American Clean Energy and Security Act passed in June.
For those who want to dig deeper, you can find both the
full text of the bill and several helpful
summaries of varying lengths provided by Senator Kerry’s team (see
here for more).
- The “Clean Energy Jobs and America’s Power Act” discussion draft introduced today by Environment and Public Works Committee Chair Barbara Boxer (D-CA) and Foreign Relations Committee Chair John Kerry (D-MA) largely mirrors the House climate bill, with a cap and trade program – re-dubbed here a “Pollution Reduction and Investment system” – that aims to limit and reduce U.S. emissions of greenhouse gases at the bill’s core. Other titles focus on how to utilize the hundreds of billions of dollars in value/revenue created by the cap and trade/PRI program, “easing the transition” to a cleaner energy future, and programs to support cleaner technologies like renewable power, advanced biofuels, naturalgas, carbon capture and storage, and nuclear power.
- The big difference between the House and Senate bills, which will be a big focus of media coverage of the bill, is the bill’s “more aggressive” 2020 emissions reduction target: 20% below 2005 levels vs. the 17% reduction targeted by the House bill. The bill also preserves the ability for EPA to separately regulate emissions from greenhouse gases where necessary under the Clean Air Act, a big priority for environmental advocates. However, the bill also reduces the portion of the economy covered by the emissions cap, moving methane emissions from coal mines, landfills and oil and natural gas distribution facilities (e.g. pipelines) outside of the cap. Instead, these emissions sources are included in the expanded list of eligible sources of domestic offsets. I’m still digging into how large a change this is, but one analyst I spoke to initially calculated that this change may erode half or more of the additional reductions required by the more aggressive 2020 emissions target.
- The bill’s clean energy and efficiency titles are not as robust as the House version. This is due to jurisdictional differences in the House and Senate. Whereas the House Energy and Commerce Committee had primary jurisdiction over both the pollution control provisions and the energy policy provisions, these areas are split in the Senate between Boxer’s EPW Committee and Senator Jeff Bingaman’s Energy and Natural Resources Committee. The ENR Committee passed their own energy bill earlier this year, which contains several provisions analogous to the House bill’s energy titles and this bill will likely be joined with the eventual evolution of the Kerry-Boxer bill on the Senate floor. The energy provisions in the Kerry-Boxer bill therefore largely focus on new grant programs through the U.S. Environmental Protection Agency (EPA), which is overseen by Boxer’s EPW Committee, while Department of Energy-related programs will have to be decided by the ENR Committee separately.
- Most of the key details about how to distribute the hundreds of billions in carbon allowance value are left blank in this discussion draft of the bill, to be filled in later. The Senate Finance Committee, chaired by Senator Max Baucus will want its say over these revenues as well, and it’ll be a key area of movement to watch as negotiations over this bill intensify in the coming month. For now, placeholder provisions indicate areas where revenues could go, and mirror the House bill.
- One big exception is a provision that would dedicate 25% of the allowance revenue raised each year to deficit reduction, a measure intended to ensure the Congressional Budget Office scores the legislation as deficit neutral. This portion of allowance revenue necessary to ensure the impact on the federal budget is neutral will change (and likely get somewhat smaller) as the Kerry-Boxer bill's various uses for allowance revenue is filled in. But whatever the end result, having to set aside a big chunk allowance value for deficit neutrality will make the already tense negotiations about the use of cap and trade revenues even more difficult in the Senate. For those interested in why this set-aside is necessary in the Senate but not the House bill and why the ultimate percentage is likely to change as the bill evolves, see the "Notes on CBO scoring" below for my best shot at an explanation of this arcane process.
- The bill includes some new support for three technologies some considered “neglected” in the House bill: nuclear energy, advanced biofuels, and natural gas. The bill includes a modest Nuclear Energy title (the House bill had no mention of nuclear power) that provides for training to expand the nuclear energy workforce and R&D into nuclear safety and waste disposal. The bill also sketches out a new EPA-managed grant program for “advanced biofuels,” a term which will be defined through rulemaking at some later date. And for a natural gas industry that felt left out by the energy industry-friendly concessions in the House bill, there’s a new incentive to encourage utilities to switch from coal-fired power plants to cleaner and more efficient natural gas plants. All of these provisions lack dedicated funding at this point. Keep an eye on the allowance allocation process to see how these end up getting funded.
- The bill makes some changes to two key cost-containment provisions meant to limit the price of carbon pollution under the bill’s cap and trade program. A hard cost ceiling is included in the bill, set initially at $28 per ton in 2012 and rising each year, backed up by the release of additional allowances from a “strategic reserve pool” similar to theone in the House bill. A floor price of $11 per ton is also set for auctioned allowances, also rising each year; the House bill set a $10 floor but a price ceiling that floated at 60% above a rolling average of carbon market prices, making it a poor mechanism of cost certainty, some argued. The mix of offsets under the bill also changes, although the Senate bill still allows up to 2 billion tons of offsets - a huge amount equal to 1/3rd of total capped-sector emissions. Whereas the House bill allows 1 billion tons of domestic offsets and up to 1.5 billion tonsof international offsets – with the sum no more than 2 billion tons annually – the Senate version changes the ratio of international and domestic offsets. Regulated firms could use 500 million tons of international offsets and 1.5 billion tons of domestic offsets each year, with the limit on international offsets raised to 750 million tons if supplies of domestic offsets are limited. It’s worth noting that EPA and CBO analysis of the House climate bill predict nowhere near that supply of domestic offsets – both assume less than 450 million tons per year through 2030. Including coal-bed methane, landfill gas, and natural gas pipelines in the list of eligible domestic offsets could expand this supply, as could including no-till agriculture practices (something Dow Chemical and the makers of other herbicides needed to practice no-till agriculture are lobbying hard for), but probably not to anywhere near 1.25-1.5 billion tons per year…
- The last notable difference I’ll include here is the bill’s somewhat stronger and more streamlined regulation of the carbon trading market. As a huge new commodities and futures market, strict oversight of the carbon trading market will be needed to protect consumers and the U.S. economy from the kinds of mistakes that led to the most recent financial crisis. The House bill bifurcates regulation of the carbon market between the Commodities Futures Trading Commission and the Federal Energy Regulatory Commission. That’s raised concerns that, as in the multiple regulators of traditional commodities and futures markets, financial firms will be able to “shop around” and look for gaps in regulatory coverage that can be exploited, potentially ending in disastrous outcomes for the U.S. economy. The Kerry-Boxer bill tries to streamline and strengthen oversight by placing regulatory authority over carbon markets solely with the CFTC.
Stay tuned at theEnergyCollective.com as the Senate climate debate heats up, and the Kerry-Boxer bill continues to evolve...
*Notes on CBO scoring: CBO scoring is very arcane - and yet very influential on the Congressional process. CBO examines - or "scores" - legislation to estimate the net impact on government tax revenues: will the bill spend more than it raises, or reduce federal tax receipts by, for example, reducing taxable personal or business income? (Note: potential increases in government agency operating costs, say due to higher energy prices under a cap and trade bill, are not included in CBO's score of budget impact, as I had originally written here). From what I've been able to understand, House bills are only scored for budget impact over a 10-year period, while Senate bills are examined over a 50 year period - first to ensure budget neutrality over the first 10 years, and then to ensure federal deficits would not be raised by more than $5 billion in each of the next four decades. That means that some tricks methods used to help keep the House climate bill budget neutral in the first ten years (like pre-selling allowances for future periods beyond the 10-year window) are unavailable to Senate policymakers. Furthermore, different uses of allowance revenue have different estimated impacts on federal revenues and therefore CBO's score. For example, rebating allowances to utilities on behalf of consumers is expected to prevent higher energy prices and therefore prevent the decrease in tax revenue higher costs would otherwise result in. So no "CBO haircut" is needed to maintain deficit neutrality for this use of allowances. By contrast, selling allowances and using the proceeds to fund government programs - say to expand energy R&D - is expected to reduce incomes due to higher energy costs and therefore reduce federal revenue under CBO's scoring. See told, you this was arcane! For now, with the ultimate use of allowance revenue left to be determined, Kerry and Boxer's teams have included the overall 25% “CBO haircut” to cover their bases. The ultimate percentage of allowances needed to maintain deficit neutrality under CBO rules will depend on the actual uses of allowance revenue. The final portion of allowances for deficit neutrality will therefore change (and likely get somewhat smaller) as allowance allocation details are filled in. (Phew... Glad that's over? Me to!)