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  An Introduction to Climate Change Legislation


Understanding Current Policy Proposals

More than a dozen legislative proposals to address climate change had been introduced in the first session of the 110th Congress as of September 2007. A few of these draft bills propose to tax GHG emissions, a greater number would establish an economy-wide GHG cap-and-trade program, and two propose cap-and-trade programs that cover only the electric power sector. In addition, the House and Senate have each passed energy bills that provide a variety of technology incentives in the electricity and transportation sectors, and elsewhere. To highlight the range of policy options already on the table, and to demonstrate how the design questions discussed in this report can be used to understand the differences between competing proposals, we summarize key aspects of the various bills now under discussion at the federal level.29

Emissions Targets

All the economy-wide cap-and-trade proposals put forward in the 110th Congress specify emissions targets out to 2030, and most extend out to 2050. Over this time period, all envision reducing U.S. GHG emissions below current levels. Proposed targets for 2030 range from reducing emissions to roughly 1990 levels (Bingaman-Specter, S. 1766; Udall-Petri draft) to achieving 25-40 percent reductions below 1990 levels (Sanders-Boxer, S. 309; Kerry-Snowe, S. 485; Waxman, H.R. 1590). The bills that cover only emissions from electric power generation aim to return that sector's emissions to 1990 levels by sometime in the 2020-2030 timeframe. Under current proposals, likely emissions prices in 2030 generally range from $30 to $100 per ton CO2. The two tax proposals that have been introduced in the House of Representatives - Stark (H.R. 2069) and Larson (H.R. 3416) - set price rather than quantity targets for U.S. emissions. Based on the modeling results discussed in Issue Brief #3, HR 3416 should achieve 1990 emission levels by 2030 (if not sooner) since it proposes to tax GHG emissions at more than $130 per metric ton CO2 in that timeframe. H.R. 2069, meanwhile, might or might not ever reduce U.S. emissions to 1990 levels: it does not account for inflation, and so - in real terms - the carbon price under this legislation is unlikely to ever exceed $60 per metric ton CO2.30

Reducing U.S. emissions to 1990 levels or below by 2030 could be consistent with achieving a global stabilization goal of 550 ppm CO2-equivalent (CO2e) if other nations follow suit by adopting similar targets - it may even be consistent with achieving a more protective stabilization target if other countries take comparable action relatively quickly. A domestic target of 1990 emission levels or below in 2030 may also be justified, however, even in the context of a less protective global stabilization goal (say 650 ppm CO2e), if it is paired with substantial reliance on offset projects in developing countries to demonstrate compliance.31 Action by other countries would still be required over the next several decades, but a tough domestic target paired with international offsets and a less demanding global stabilization target would allow for greater delay in implementing reductions on the part of developing countries. Without substantial use of international offsets, a program designed to reduce domestic emissions substantially below 1990 levels by 2030 would be expected to produce emissions prices at the higher end of the range noted above (i.e., on the order of $100 per ton CO2e), the same target with substantial use of offsets would likely result in prices at the lower end of the range (i.e., approximately $30 per ton CO2e).

Program Coverage and Point-of-Regulation

Current legislative proposals adopt three main approaches to the issue of program coverage and point-of-regulation. The electric-sector cap-and-trade bills regulate CO2 emissions only and impose the compliance obligation at the point of emissions - in other words, on electricity generators. Because they are limited to one sector, these bills would cover roughly one third (34 percent) of total U.S. GHG emissions.32 The two tax proposals that have been introduced also regulate only CO2 emissions, but provide economy-wide coverage by taxing fossil-fuel producers (coal mines, petroleum refiners, and natural gas processors or pipeline operators) and importers on the basis of fuel carbon content. These bills would effectively cover roughly 80 percent of total U.S. GHG emissions. The remaining economy-wide cap-and-trade bills would all regulate the six major GHGs listed in the Kyoto Protocol - carbon dioxide (CO2), methane (CH4), nitrous oxide (N2O), hydrofluorocarbons (HFCs), perfluorocarbons (PFCs), and sulfur hexafluoride (SF6) - but for practical reasons would probably exclude fugitive emissions of methane and nitrous oxide. As a result, these bills could cover up to 85 percent of total U.S. GHG emissions.

Among the economy-wide cap-and-trade bills, only the Udall- Petri draft takes an entirely upstream approach to regulating emissions from fossil-fuel use. The Bingaman-Specter proposal (S. 1766) adopts a hybrid approach, regulating natural gas and oil upstream (specifically, the compliance obligation would fall on natural gas processors, petroleum refiners, and importers of both fuels), while regulating coal emissions downstream at large industrial facilities that burn coal - mainly electric generating units. Because virtually all downstream coal users are large emitters, this approach essentially covers all CO2 emissions from fossil-fuel combustion. Therefore, both of these bills would likely capture 85 percent of total U.S. GHG emissions under a single pricing policy.

A different type of hybrid approach is proposed in Lieberman-McCain (S. 280), which regulates transportation fuels upstream at the petroleum refiner and natural gas and coal emissions downstream at large emitters (above 10,000 metric tons of emissions per year). Because this bill does not cover emissions from primary energy use in the residential or agricultural sectors, it would miss 6 percent of total U.S. GHG emissions, as well as any emissions from small sources in the manufacturing and commercial building sectors.33 The Lieberman-Warner draft uses a similar approach. Other bills do not specify whether regulation would be upstream or downstream. A fully downstream program focused on large CO2 emitters and includable sources of other GHGs would cover slightly less than half of total U.S. GHG emissions.

Cost vs. Emissions Certainty

By their nature, tax bills provide the most certainty about emissions prices - generally they do not even set specific quantity targets. The Stark proposal (H.R. 2069) attempts to combine near-term price certainty with a long-term emissions target: it calls for a tax that rises continually until U.S. CO2 emissions fall to 80 percent below 1990 levels. As noted previously, however, this target is unlikely to be achieved because the proposed rate of increase in the emissions tax does not account for inflation. Nevertheless, H.R. 2069 illustrates how a tax proposal might attempt to combine near-term price certainty with a long-term emissions target. Current cap-and-trade proposals, meanwhile, fall along a spectrum in terms of the relative emphasis they place on cost vs. emissions certainty. The Bingaman-Specter bill (S. 1766) and Udall-Petri draft include a safety-valve mechanism to provide cost certainty; in both proposals, the safety-valve price starts at $12 per metric ton of CO2 and escalates 5 percent (above inflation) thereafter.34 By adjusting the rate of escalation such that the safety-valve price eventually exceeds the possible cost of reductions needed to achieve a given emissions target, this type of proposal could be designed to favor price certainty in the near term and emissions certainty in the long term. Other bills use allowance borrowing to address cost and price-volatility concerns. Under this approach, the aggregate amount of emissions allowed over time should remain (essentially) unchanged,35 but firms can borrow against future emission-reduction requirements to meet short-term compliance needs and make up the difference later. Both Lieberman-McCain (S. 280) and the Lieberman-Warner draft allow regulated entities to borrow up to 15 percent of their total compliance obligation, limiting the borrowing period to five years. Compared to a safety valve, borrowing provisions obviously place a stronger emphasis on maintaining emissions certainty: firms can re-shuffle their emissions profile over time to smooth out short-term supply-demand imbalances and associated price volatility, but eventually aggregate emissions from all firms still have to meet the cap.36

Another approach to balancing cost vs. emissions certainty is proposed in the Lieberman-Warner draft legislation, which would create a regulatory body with discretionary power to adjust the number of allowances in circulation and/or the rate at which firms can borrow. Even as it sought to manage price volatility and other market concerns, this new government entity would presumably also operate under some obligation to ensure that long-term environmental goals are met. The concept of a Federal Reserve-like entity to oversee allowance markets is a relative new one and deserves further consideration.37 Ordinary cap-and-trade proposals that do not include provisions for borrowing or a safety valve provide the greatest emission certainty - examples include the Kerry-Snowe (S. 485) and Waxman (H.R. 1590) bills - but leave much greater uncertainty about compliance costs.

Allowance Allocation and Revenue Distribution

Cap-and-trade programs and carbon tax legislation tend to take widely different approaches to allowance allocation and revenue distribution. The two tax proposals introduced in the 110th Congress direct receipts from emissions taxes into the general fund of the U.S. Treasury. The Stark bill (H.R. 2069) does not attempt to dictate the subsequent use of these funds whereas the Larson bill (H.R. 3416) specifies that new revenues are mostly to be used to provide payroll tax rebates, with a declining portion reserved for R&D support and transition assistance to vulnerable industries.

Current cap-and-trade proposals typically specify a blend of free and auctioned allocation, though they rarely allow revenue from any auction to go to the general fund of the U.S. Treasury. The share of allowances to be auctioned ranges from 24 percent of the cap (Bingaman-Specter, S. 1766) up to 80 percent (Udall-Petri draft), with remaining allowances to be allocated for free to various stakeholders.38 Among recently introduced proposals with detailed provisions concerning this issue, several leave decisions concerning the distribution of allowances available for free allocation to regulatory administrators. Some bills, including S. 1766 and the Feinstein-Carper electric-power sector bill (S. 317), start with a smaller auction but gradually move towards auctioning most allowances. Proceeds from auctioning allowances are used to fund technology R&D (several bills), guaranteed loan provisions (Lieberman-McCain, S. 280), transition assistance (S. 280, S. 1766), engagement with developing countries (Udall- Petri draft), adaptation measures (several bills), debt reduction (Udall-Petri draft), and other measures.

Free allowance allocation to industry ranges from 53 percent in S. 1766 to 20 percent in the Udall-Petri draft. S. 280 specifies that allowances given away for free - the amount is unspecified - must go to regulated entities who surrender allowances; other bills - S.1766 is example - distribute free allowances to industries that are not directly regulated to reduce cost impacts on these industries. Most of these bills do not specify in advance how free allowances are to be distributed to individual firms within a sector; however, the two bills that are limited to the electric sector provide specific direction on these issues. Specifically, Alexander-Lieberman (S. 1168) distributes free allowances on the basis of historic heat input, while Feinstein-Carper (S. 317) provides for an updating allocation based on electricity output (existing nuclear generators are excluded).

Provisions to Address International Competitiveness Concerns

Several current legislative proposals - including Bingaman- Specter (S. 1766), the Udall-Petri draft, as well as the Stark tax proposal (HR 2069) - can be said to address competitiveness concerns by adopting less aggressive emission-reduction targets (Udall-Petri) or emissions prices (H.R. 2069) than competing proposals, or by including a safety valve that limits costs (S.1766).

Some current proposals also include more targeted provisions to address competitiveness concerns in specific industries. Most cap-and-trade bills, for example, direct free allowances to industries that face competitive pressure. Bingaman- Specter also includes provisions that allow the President, starting in 2020, to require that importers of carbon-intensive goods - iron, steel, aluminum, or cement, for example - submit allowances for a product's embedded carbon content if the country of origin does not have a climate policy comparable to that of the United States. This mechanism not only creates incentives for major trading partners to implement GHG-reduction policies, it also seeks to address the problem of emissions leakage. The Lieberman-Warner draft legislation contains similar provisions.

Technology Provisions

All of the current climate-policy proposals before Congress make some provision for technology research, development, demonstration, and deployment. In addition to specific technology mandates for the electricity and transportation sectors, which are discussed in the next two sections, a variety of technology provisions are included in the proposed climate legislation and the energy and tax bills now being debated by Congress. Among the climate change policy proposals, the Larson emissions tax bill directs one-sixth of revenues - up to $10 billion annually - to a newly created Energy Security Trust Fund that would support research and development for clean energy technologies. The Lieberman-McCain cap-and-trade proposal would create a new Climate Change Credit Corporation, funded by allowance auctions, which would promote low-carbon technology deployment.

The separate energy bills passed by the House and Senate include a variety of technology provisions and thus highlight a broad spectrum of options for addressing technology development and deployment. The energy bill passed by the House would create an Advanced Research Projects Agency- Energy (ARPA-E) within the Department of Energy. This agency would be modeled after DARPA at the Department of Defense with the similar aim of supporting cutting-edge research in high-risk, high-return technologies.39

Both the House and Senate energy bills also aim to increase energy efficiency by promoting the deployment of more efficient lighting technologies through measures such as advanced procurement, efficiency standards for light bulbs, and technology prizes. In addition, these bills would amend the Energy Policy and Conservation Act to expedite rulemakings on efficiency standards and to update standards for a variety of devices, including consumer appliances and space heating and air conditioning products.

The House energy bill includes provisions designed to promote international technology transfer. Specifically, it authorizes $200 million for the U.S. Agency for International Development to promote clean and energy-efficient technologies; in addition, it provides funding to support a Clean Energy Technology Exports Initiative. The House bill also establishes a government corporation called the International Clean Energy Foundation that would make grants to promote and advance GHG-reducing technologies and projects outside the United States.

Additional Policies for the Electric Power Sector

Many of the climate-related policy proposals currently before Congress include a Renewable Portfolio Standard (RPS) - that is, a requirement that electric generators produce a minimum percentage of electricity using renewable energy technologies. The Kerry-Snowe bill would establish a 20 percent RPS for 2021, phased in 5 percent at a time in four-year increments. This proposal also creates an energy efficiency performance standard for retail electricity suppliers that requires suppliers to reduce electricity use by 9 percent by 2021. The Sanders-Boxer and Waxman bills contain similar renewable portfolio and energy efficiency requirements. The House energy bill includes a 15 percent RPS for 2020 that must be met by new renewable generation (i.e., facilities placed in service since 2001), with energy efficiency projects eligible to fulfill about one-quarter of the total RPS requirement. The House energy tax bill extends through 2012 the production tax credit for renewable energy technologies (including wind, biomass, geothermal, marine, hydrokinetic, and qualified hydropower), although it places a limit on the production credit for new facilities that start operations after 2008. The energy bill passed by the House includes support for research and development in renewable energy technologies for generating electricity, authorizing an average of more than $200 million annually between 2008 and 2012 for marine, geothermal, and solar renewable energy technologies. The Senate energy bill also includes research and development support for marine, hydrokinetic, and offshore wind energy technologies. Both bills include funding for "smart grid" technology, with the House bill authorizing over $2 billion in matching funds for related deployment efforts.

Finally, many bills currently before Congress support research, development, and demonstration efforts to advance geologic carbon capture and storage (CCS). Among the climate proposals, the Bingaman-Specter bill creates incentives for this technology by providing bonus allowances for CCS projects. The Lieberman-Warner proposal calls for the newly-created Climate Change Credit Corporation to use 20 percent of proceeds from auctioning allowances to support public-private partnerships aimed at commercializing CCS technology. The House and Senate energy bills both include extensive support for CCS, providing for federal research, development, and deployment support on the order of $1.5 billion over a five-to-six year period starting in 2008.

Among the bills that propose to establish a GHG cap-and-trade program for the electric sector only, the Alexander- Lieberman legislation would create a New Source Performance Standard for CO2 emissions from new electric generating units.

Additional Policies for the Transport Sector

Several of the climate bills (e.g., Kerry-Snowe, Sanders- Boxer, etc.) have extensive provisions concerning vehicle and transportation standards, including requirements aimed at supporting a nationwide supply and distribution infrastructure for biofuels; a 35 percent credit for manufacturers who invest in energy-saving vehicle components; a $3,000-$3,150 tax credit for the purchase of new hybrid, flex-fuel, or plug-in hybrid vehicles; and a GHG emissions standard for new passenger vehicles (the proposed standard, which is specified in grams of CO2 emissions per mile, is identical to the standard that has been adopted by California).

The energy bills that were passed in the summer of 2007 by both chambers of Congress include provisions designed to reduce GHG emissions from the transport sector. In particular, the Senate bill included provisions to raise Corporate Average Fuel Economy (CAFE) standards for light-duty vehicles (passenger cars and light-duty trucks) to 35 miles per gallon (mpg) by 2020 (current standards equate to around 24 mpg) and to make the CAFE program more flexible by allowing credit trading among manufacturers. Both the Senate and House bills include measures to support new vehicle technologies: for example, the House bill includes loan guarantees for advanced vehicle battery manufacturing and grants for plug-in hybrid demonstration programs. The House also passed an energy tax bill that would establish a new tax credit - with a base amount of $4,000 - for consumers who purchase plug-in hybrid vehicles.

The Senate energy bill also includes a renewable fuel standard (RFS) that would mandate 36 billion gallons of renewable fuels by 2022, with 21 billion gallons of that total coming from advanced biofuels such as cellulosic ethanol, biodiesel, or biobutanol. Biofuels would be assessed and labeled based on lifecycle GHG emissions. Additional provisions would support the deployment of biofuel infrastructure; these include grants for installing fuel distribution facilities and support for research on the environmental and economic impacts of biofuels. The total funding authorization for renewable, low-carbon, and biofuels is more than $1 billion. Although the House bill does not contain an RFS, it does include support for biofuels-related research and development, including studies on economic and technical feasibility, alternative infrastructure needs, and environmental impacts. Finally, the tax bill passed by the House extends the current production tax credit for biodiesel and creates a new production tax credit for cellulosic ethanol of 50 cents per gallon.

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29. As various proposals for federal legislation continue to be debated, updated information on the key features of current bills will be available at http://www.rff.org/climatechangelegislation.

30. Indeed, at an annual nominal inflation rate of 2 percent per year - historically a low rate - the carbon tax would max out at $50-60 per metric ton CO2 in real terms after about 50 years and decline after that.

31. For example, a 2030 emissions cap set at 25 percent below 1990 levels could be viewed as a commitment to cap U.S. emissions at 1990 levels plus finance additional reductions (equal to 25 percent of domestic 1990 emissions) in developing countries.

32. CO2 accounts for nearly all electricity sector GHG emissions.

33. Issue Brief #1 provides additional detail about the size distribution of various emission sources and likely coverage of downstream programs.

34. This $12 figure is expressed in 2012 dollars; it translates to about $11 in current (2006) dollars.

35. Actually, aggregate emissions over a given time period will tend to fall because borrowing provisions generally charge a rate of interest on borrowed allowances to prevent strategic manipulation.

36. Arguably, the distinction between a safety valve and borrowing begins to blur if safety-valve allowances are drawn from future auctions as they are sold and if, as borrowing occurs, there is some natural feedback to future adjustments in the cap.

37. This idea is discussed in greater length in Issue Brief #5, which compares different approaches to regulation, including taxes and tradable permits.

38. S. 1766 also sets aside 14 percent of available allowances for direct technology incentives and 9 percent for state governments. This might be viewed as equivalent to auctioning a 23 percent share of allowances with the revenues being directed to particular purposes.

39. An ARPA-E agency was included in the America COMPETES Act (H.R. 2272) which was signed into law by the President on August 9, 2007.

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