House passes comprehensive energy and climate change bill; all eyes turn to the Senate
On June 26, 2009, after intense lobbying and pressure from the Obama Administration, the House of Representatives passed H.R. 2454, the American Clean Energy and Security Act of 2009 (ACES) by a vote of 219–212, with eight Republicans voting in support, 44 Democrats voting in opposition, and three abstentions. The legislation was sponsored by Rep. Henry A. Waxman, Chairman of the House Energy and Commerce Committee, and Rep. Edward J. Markey, Chairman of the House Select Committee on Energy Independence and Global Warming.
Summary of major provisions
ACES is the first piece of legislation enacted by the House to limit the growth of greenhouse gas emissions by establishing a federal cap-and-trade mechanism. The bill is intended “to create clean energy jobs, achieve energy independence, reduce global warming pollution and transition to a clean energy economy.” Its key provisions include:
- an emissions cap designed to reduce U.S. emissions 3 percent from 2005 levels by 2012, 17 percent from 2005 levels by 2020, and 83 percent from 2005 levels by 2050 (which is commensurate with the often-mentioned presidential campaign goal of reducing emissions 80 percent from 1990 levels by 2050);
- a mechanism for trading and banking of allowances as well as rules regarding offsets;
- a Renewable Electricity Standard requiring electric utilities to meet 15 percent of their electricity demand through renewable energy sources by 2020 and to reduce demand by an additional 5 percent through energy efficiency and conservation measures;
- energy-efficiency standards for buildings, appliances, and industry, as well as transportation policies;
- investment in clean and renewable energy technologies, research for carbon capture and sequestration, and basic scientific research and development; and
- protection for consumers from increased energy prices.
Next steps in the Senate—and in Copenhagen
Immediately after the House passed ACES, President Obama called on the Senate to “get to work” in passing its own version of a comprehensive energy and climate bill. The Senate Environment and Public Works Committee scheduled a July 7 hearing entitled “Moving America toward a Clean Energy Economy and Reducing Global Warming Pollution: Legislative Tools.” Witnesses include Energy Secretary Steven Chu, EPA Administrator Lisa Jackson, and Agriculture Secretary Tom Vilsack. Senate leaders have stated that they expect to bring legislation to the floor in the fall. While it is unclear whether the Senate will be able to pass its own bill, the consensus is that the provisions passed by the House would only be weakened by the Senate, due to the deep political divide over major issues raised by the legislation.
Even if there is no action by the Senate in the near term, passage of ACES by the House will enable the Obama administration to say that it has changed the course of U.S. energy policy and taken action to address global warming when it joins other nations in Copenhagen in December 2009 to negotiate a new global climate treaty. President Obama will be able to point to House passage of the legislation as a sea change from the prior administration’s lack of action on climate change regulation.
The legislation could lead to major changes across the economy, including electric power generation, manufacturing, construction, and agriculture. Political squabbling between representatives from different geographic areas with differing views and interests kept the bill in flux right up to the point of passage.
The cap-and-trade mechanism would affect regulated entities across many sectors that are responsible for approximately 85 percent of the greenhouse gas emissions in the U.S. Beginning in 2012, electric utilities and producers and importers of petroleum and coal-based liquid fuels would be required to obtain emissions allowances for each ton of greenhouse gases that they emit directly, or that are embedded in the fossil fuels they produce or distribute. Each year, the number of available allowances would be ratcheted down, leading to the reductions summarized above. Industrial sources would be subject to similar regulation as of 2014, and local natural gas distributors would be required to comply starting in 2016.
One of the issues highlighted during the presidential campaign and in recent weeks concerns how sources obtain the initial allowances, or permits, to emit greenhouse gases. The initial mandate to auction 100 percent of allowances waned significantly, due to political pressure from industry. In the legislation that passed the House, most of the initial allowances will be allocated at no cost to regulated entities. The proportion of allowances to be auctioned will increase over time, eventually reaching 85 percent.
ACES permits regulated entities to use offsets as an alternate mechanism to obtaining allowances for each ton of emissions, although there are limits on the total percentage of offsets permissible. An offset is created when an unregulated entity reduces greenhouse gas emissions or greenhouse gases are demonstrated to be sequestered permanently, such as through afforestation. Offsets can be controversial, due to the difficulty in monitoring and regulating the offset source to ensure that the offsets are genuine and not being double-counted. The offset provisions in ACES will likely spark activity in the forestry industry because of the way that offsets are defined and managed. One of the key concessions to the farm belt was that the Department of Agriculture would have exclusive control over forestry and agricultural offsets; the EPA will oversee all other types of offsets.
Renewable electricity standard
The legislation contains many provisions to spur development of clean and renewable energy. The Renewable Electricity Standard requires electric utilities to obtain 20 percent of their electricity demand from renewable energy sources and increase energy efficiency by 2020. The legislative wrangling occurred down to the wire, including last-minute changes to the definition of what constituted renewable biomass. Such debates will likely continue as the Senate tackles these issues.
Studies conducted by the Congressional Budget Office and others estimate that the initial price of an allowance to emit one ton of carbon dioxide will be approximately $13 (as of 2012) and that the cost will rise over time as the cap is reduced. The Congressional Budget Office estimates that the average American household would pay an additional $175 per year in energy costs by 2020, but, due to provisions to protect low-income households, those individuals would actually decrease their annual energy costs by $40 through available rebates and incentive programs. With regional programs such as RGGI fetching just over $3 a ton in current auctions, it will be interesting to watch the effect of a federal program, if any, on the existing regional trading programs.
Time to prepare
For many years, we wondered “if” greenhouse gases would be regulated; then the question became “when?” Now the focus is on when and how the Senate will respond. Given the changing political landscape, regulated entities would be well-advised to begin to assess their current emissions levels and determine future costs of compliance. Beyond these anticipated costs, regulation of greenhouse gases also has the potential to spur innovation in energy-efficient technologies and increase renewable energy development. Those entities that are prepared for the coming changes will be well-positioned to take market advantage.
Our Energy, Environmental, and Government Relations teams are poised to help you monitor, assess, and participate in shaping what is likely to be some of the most significant energy policy legislation in a generation. Virtually every trade association, industry group, and major corporation, and many states, already has weighed in, or will weigh in, with Congress on the myriad issues presented by this legislation.
The following websites provide additional information: