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The American Power Act: Cap and Trade 2.0

Climate Watch Blog

June 14, 2010BY Sarah Terry-Cobo
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John Kerry

On May 12 Senators John Kerry (D-MA) and Joseph Lieberman (I-CT) released the first draft of the American Power Act.

On May 12, in the midst of the growing oil spill crisis in the Gulf of Mexico, Senators John Kerry (D-MA) and Joseph Lieberman (I-CT) released the first draft of the American Power Act, without the support of Lindsey Graham (R-SC), originally a co-author of the bill.

Seen as the companion bill to the climate and energy bill authored by Representatives Henry Waxman (D-CA) and Edward Markey (D-MA), the Senate version, for the first time, establishes greenhouse gas (GHG) emission limits on U.S. industry, namely utilities, petrochemicals and large manufacturers. To gain industry support, Kerry and Lieberman have tailored the pollution limits for each sector, rather than using a one-size-fits-all approach.

Each sector has a deadline for entering the market: utilities start at the beginning of 2013, while natural gas providers and heavy industry enter in 2016.

In an open letter published on the Grist and the Huffington Post websites, Kerry called the bill a good one but not a perfect one:

"...It's got to be an effort that makes my colleagues -- and that has to include Republicans so we can get to 60 -- comfortable about the jobs we're going to create and the protection for consumers and the national security benefits... And it has to address those pieces on their terms. The good news: I think we got that balance right." (Read more from Kerry and the public's response.)

What are the Targets? How do they Differ Between Bills?

The Senate bill's reductions targets are nearly identical to those in the House version, but how and when industries must meet those targets is vastly more complex. Regulated sectors must reduce their GHG emissions 17 percent (compared with 2005 levels) by 2020 and 83 percent by 2050. However, the targets in both bills are less than what other industrialized countries have committed to under the Kyoto Protocol, where reduction targets are set against 1990 levels.

Cap and Trade 2.0

Both the Senate and House bills aim to create a regulated carbon market, although the Senate version has added a "dividend," or rebate, approach to the cap and trade market at the heart of both proposals and already established in Europe. The dividend approach returns a portion of revenues generated by trading some of the pollution permits back to consumers in the form of energy rebates.

Sectors participating in this new market include electric utilities, petrochemical refiners, and manufacturing and heavy industry. Each sector has a deadline for entering the market: utilities start at the beginning of 2013, while natural gas providers and heavy industry enter in 2016.

When regulations begin in 2013, many of the pollution allowances will be given away for free, and the rest auctioned.

Petrochemical refineries and importers will also be regulated starting in 2016 but will not be allowed to trade pollution credits on a carbon exchange. Instead, they must purchase fixed-price allowances each quarter, which cannot be traded or sold. The Environmental Protection Agency (EPA) will buy and sell these allowances from a strategic reserve in order to stabilize the price for the permits. Any allowances that the industry does not purchase will be rolled over to the next quarter's auction.

The Senate bill would only allow regulated entities to purchase these pollution permits, in this case, the big three -- utilities, petrochemicals and large manufacturers. A handful of small polluters are also allowed to purchase allowances, including consumers using heating oil or propane to heat their homes. The aim of restricting the market only to heavy polluters is to keep out speculators looking to profit from the market, rather than reduce pollution levels.

When regulations begin in 2013, many of the pollution allowances will be given away for free, and the rest auctioned. Again, to help prevent price volatility, the bill establishes a "price collar" of how much these pollution credits can be traded between industries, with a floor of $12 and a ceiling of $25 per ton of carbon. The EPA can buy and sell allowances to help stabilize the price of pollution permits within that price range.

In the first year of the program, there will be 4.722 billion pollution allowances issued (1 allowance equals 1 ton of carbon). Each entity must hold an allowance for each ton of GHGs emitted during the previous year, except for emissions from "renewable biomass" sources, such as wood chips. If a utility polluted more in 2013 than the year before, it will need to bid for additional allowances on the market.

What Others Have Said About the Bill

John Kerry

The next challenge will be to parse the complex matrix of pollution allowances and how they will create reductions over time.

So far, the bill has gained some support -- however cautious -- from energy policy analysts, who note it is "better than nothing," and a good place to start.

In an analysis of the pollution allowances, Brookings Institution staffer and co-director of economic studies, Ted Gayer cautioned that giving away allowances for free "misses an opportunity to substantially lower the overall cost of a cap-and-trade program." By his estimate, if all pollution permits were auctioned, it would generate $60 to $80 billion annually in the beginning of the program, and in the next couple of decades, could generate up to $100 billion annually. This revenue, he argues, could be used to help close the federal budget deficit.

Joseph Romm, left-leaning blogger at Climate Progress and a former Clinton administration official, said that while the bill "is worth settling for," and could go further, it could reasonably pass: "As I've said many times, the APA meets key criteria for the kind of bill one could reasonably expect Congress to enact right now, which I enumerated in What to look for in the bipartisan climate and clean energy jobs bill."

David Brooks, the conservative columnist for the New York Times also wrote about the potential benefits of the bill in his April 29 column:

"The bill, like all politically plausible bills these days, is larded with special-interest provisions and public giveaways to defuse opposition and win votes. But it does perform a few essential tasks. To boost innovation, it raises the price on carbon and devotes some of that money (though not nearly enough) to research and development. In addition, it establishes a predictable price for carbon."

The next challenge will be to parse the complex matrix of pollution allowances and how they will create reductions over time. Many experts call the reductions "modest," but say the passage of U.S. legislation is key to negotiating a post-Kyoto treaty at the next round of U.N. climate talks in Cancun at the end of this year.

For a detailed comparison of climate bills in the current Congress, read this analysis (pdf) by the World Resources Institute senior climate and energy associate, John Larsen.