The American Clean Energy Security Act - Quick Survey of Changes from the Discussion Draft

On Monday, the House Energy and Commerce Committee will begin a week-long marathon to pass long-overdue clean energy and climate legislation.  After more than a month of extensive negotiations among members of the committee, Chairmen Henry Waxman and Ed Markey introduced the American Clean Energy Security Act, H.R. 2454, on Friday. 

The ACES bill builds upon the discussion draft that Waxman and Markey circulated in March.  Though the bill's major components are the same, Waxman and Markey made important additions and changes to win support from moderates as well as progressives.  They enter next week poised to make good on Chairman Waxman's pledge to pass this landmark legislation through his committee by Memorial Day.  

With the help of my NRDC colleagues, I've collected our initial read on the bill introduced yesterday.  You should read this alongside our "first read" on the discussion draft, posted March 31, because here we focus on some of the key changes from that draft.  Where things are pretty much the same, I haven't always repeated what we said before.

The biggest addition, of course, was to specify how the valuable emissions allowances should be distributed.  My colleague Dan Lashof posted an analysis yesterday of how the allowances are to be distributed initially, the purposes behind and strings attached to those allocations, and how the initial distributions change over time.  I won't repeat that here, but will comment on some of the distributions in covering other changes in the bill.

So let's dive in again.  As before, the bill has four titles:  Clean Energy, Energy Efficiency, Reducing Global Warming Pollution, and Transitioning to a Clean Energy Economy.  Here are the highlights of each section, calling attention to big items that have changed significantly:

Title I - Clean Energy                                                   

Combined Renewable and Efficiency Electricity Standard.  The Renewable Electricity Standard (RES) and Energy Efficiency Resource Standard (EERS) have been combined into one. 

• The combined standard requires covered utilities to obtain 20 percent of their electricity from renewable resources by 2020, but up to 5 percent of that amount may be met through energy savings. A governor may petition to reduce the renewable component of a utility's obligation to as low as 12 percent and increase the efficiency component to as much as 8 percent. The new provision is substantially less ambitious than the separate provisions of the discussion draft.
• The provision also gives utilities credit for some resources that are not genuinely either renewable or efficiency. Utilities also receive credit for using coal mine methane and municipal solid waste.
• The definition of eligible biomass has been expanded, resulting in the removal of important safeguards. While important protections remain on both federal and non-federal lands, including roadless areas and old-growth and mature forests, the new definition allows more biomass to be taken from federal lands, putting carbon sequestration and ecological values in national forests at risk.

New Coal Plants and Carbon Capture and Storage.  To supplement the emissions cap, the ACES bill includes emission standards and incentives for new coal plants and CCS deployment.  Provisions to set CCS regulations and undertake research, development, and early demonstrations are largely unchanged from the discussion draft.  The biggest changes are as follows: 

• Incentives for commercial deployment of CCS technology. The bill allocates 2-5 percent of the emissions allowances to fund CCS deployment. Coal-fired power plants and industrial sources can receive incentives on a dollar-per-ton-of-CO2 basis to deploy CCS technology. Higher performance, early movers, and lowest bids are favored.  
• Coal-fired power plant standards.The billretains the discussion draft's CO2 emission standards for new coal- and petroleum coke-firedpower plants, though now they are expressed in terms of percent reduction from uncontrolled emissions. The schedules for meeting those standards are more extended than in the discussion draft, with an outer limit compliance date of 2025. Thus, units that receive permits between 2009 and 2020 must achieve a 50 percent CO2 emission reduction four years after the date on which a specified (relatively modest) amount of U.S. CCS capacity is operational, and not later than 2025. Units permitted in 2020 or after must achieve a 65 percent CO2 emission reduction upon startup.The CCS incentive payments will serve as a driver for earlier compliance, since plants that do not meet the standards within a specified time after start-up will lose some or all of their CCS payments.  

Clean Transportation.  The ACES bill encourages cleaner transportation through a mixture of incentives and standards to enhance energy security and curbing global warming by reducing our reliance on oil. 

• Low carbon fuel standard. The bill drops a low carbon fuel standard that would have replaced the renewable fuels standard in 2023 and prevented total carbon emissions associated with fuels production and use from growing in the interim. Oil companies opposed the interim measure, which would constrain emissions from high-carbon fuels from tar sands and other sources. 
• Plug-in electric vehicle deployment. The bill directs the Energy Department to develop a large-scale plug-in hybrid vehicle program in selected regions. It funds deployment measures such as battery exchanges and charging infrastructure, with the revenue from auctioning 0.375% of the allowances in 2012- 2017. It also provides the same amount over the same years for domestic production of plug-in hybrids vehicles, assembly plant retooling, and domestic battery production. 
• Investments in clean vehicles. The bill adds a new manufacturing retooling incentive to defray up to 30 percent of the retooling cost for facilities to manufacture advanced technology vehicles and components. For 2012-2016, vehicles must be 25 percent more fuel efficient than similar 2009 models; the reference point rises in later years. The retooling incentive is funded by 2.25 percent of the allowances for 2012-2017, dropping to 1 percent for 2018-2025. 
• Vehicle standards. As in the discussion draft, the efficiency title of the bill includes provisions for federal greenhouse gas and mileage standards for passenger vehicles, and GHG standards for other classes of mobile sources. 
• Transit and other traffic-reducing investments. These are eligible to receive support from allowance revenue through state energy efficiency programs, described next. 

State Energy and Environment Deployment ("SEED") Fund.  States would receive allowances to promote investments in energy efficiency and renewable energy production.  The allocation begins with 10 percent in 2012, ramps down to 5 percent by 2022, and goes to states based on a formula taking into account population and energy consumption.  Funding goes to a range of renewable and efficiency programs (including building code enforcement and building retrofits) which can substantially reduce consumer energy bills and the overall cost of meeting the emission reduction targets.  As mentioned, funds can also be used for transportation efficiency improvements.  More funds would allow states to capture even more of the cost-effective energy efficiency potential, which would further lower the cost of capping carbon.  

Smart Grid and Electricity Transmission. The bill's provisions on these two topics are little changed from the discussion draft. 

Clean Energy Innovation Centers.  As a new item, the ACES bill creates eight Clean Energy Innovation Centers, each a consortium of at least two universities and each focused on a priority area such as buildings, transportation, energy storage and smart grid transmission, and water technologies.  They are supported by the revenue from 1 percent of the allowances. 

Planning for Offshore Energy Development.  Another new provision aims to facilitate development of offshore renewable energy facilities in a manner that protects the marine environment.  It requires the Federal Energy Regulatory Commission, the Department of Interior, and the National Oceanic and Atmospheric Administration to jointly recommend an approach for developing regional plans for offshore siting of renewable energy facilities.  The Council on Environmental Quality would decide whether to implement the recommended approach and then coordinate implementation. 

Title II - Energy Efficiency 

Building Energy Efficiency.  The ACES bill improves upon the targets for energy efficiency improvements in new residential and commercial buildings proposed in the discussion draft.  The Energy Department must adopt a model national code that meets these targets, based on the work of designated standard-setting organizations (ASHRAE and IECC).  One-half of one percent of the allowances is available to state and local governments that adopt codes meeting or exceeding the national model code.  Certain other funds are conditioned on the degree of their compliance with the national target.  The bill also now authorizes federal enforcement of the national code through civil penalties and injunctions.  Other building energy provisions in the discussion draft are retained, including incentives for retrofitting existing residential and commercial buildings, a rebate program to replace old inefficient manufactured homes, and a building energy performance labeling program.

Lighting and Appliances.  The bill retains the discussion draft's strong new standards and incentives for classes of lighting equipment and appliances, including the best-in-class program and bounties for early retirement.

Transportation Efficiency.  As in the discussion draft, the bill protects California's greenhouse gas emission standards and directs EPA and the Transportation Department set federal GHG and mileage standards, respectively, equivalent to California's.  EPA standards are also required for other classes of mobile sources.  The bill retains and improves upon the discussion draft's new requirements for state transportation agencies to set and achieve regional greenhouse gas emission reduction goals.  EPA must certify that the plans are likely to succeed, and assess the overall transportation sector's progress in reducing emissions every six years.

Energy Efficiency Resource Standard.  As mentioned above, the EERS has been combined with the Renewable Electricity Standard.

Industrial Energy Efficiency.  These provisions are essentially the same as in the discussion draft. 

Low Income Community Energy Efficiency.  The bill adds a new program authorizing the Energy Department to make grants to community development organizations to promote energy efficiency and clean energy projects in low-income rural and urban communities.  (Other low-income assistance is address under Title IV.)

Title III - Reducing Global Warming Pollution 

GHG emission reduction targets. The ACES bill places firm limits on emissions of carbon dioxide and other designated heat-trapping pollutants. Though still consistent with USCAP recommendations, the 2020 cap has changed from the discussion draft. 

• Economy-wide goals.  The bill has two different percentage reduction targets.  The first are economy-wide goals, and these have not changed:  3 percent below 2005 levels by 2012, 20 percent below by 2020, 42 percent below by 2030, and 83 percent below by 2050.  These economy-wide goals are less significant than the firm cap on covered sources, but they guide emission reduction expectations for sources outside the cap. 
• Enforceable pollution cap on covered sources. As before, sources representing about 85 percent of U.S. carbon emissions are covered by a firm, enforceable cap on their emissions. Electric generating units and fuel refiners and importers are covered starting in 2012, major industrial emitters in 2014, and natural gas local distribution companies in 2016. The cap in 2020 has been relaxed to 17 percent below 2005 levels. That's less reduction than the 20 percent cut proposed in the discussion draft, but the revised target is in the middle of the USCAP recommended range.  
• Scientific review. Like the discussion draft, the bill directs the National Academy of Sciences to review the targets periodically in light of the best available science, and the President is to recommend program changes to Congress. 

Supplemental Reductions. Like the discussion draft, the bill provides for further reducing emissions through reductions in tropical deforestation in other countries (which now accounts for a fifth of global carbon emissions).  The bill provides for auctioning 5 percent of the emissions allowances to fund a program to achieve in 2020 supplemental reductions equal to 10 percent of U.S. 2005 emissions. 

Cost-Control.  In addition to trading, banking, and limited borrowing of emissions allowances, the bill provides other cost-reducing measures. 

• Offsets. The bill retains the 2 billion ton limit on offsets, split evenly between domestic and foreign sources, but EPA can allow up to 1.5 billion tons of international offsets if there are insufficient domestic ones. The bill retains the 20 percent environmental premium with the use of international offsets starting in 2017. A capped source using international offsets after that date must turn in 1.25 tons of offset credit to cover 1 ton of domestic emissions. This is a change from the discussion draft, which provided the 1.25-to-1 compliance ratio for both domestic and international offsets starting in 2012. The bill also retains draft provisions, including an Offsets Integrity Advisory Board, to assure that offsets are high-quality and produce environmental progress as well as cost-reduction. 
• Strategic reserve. A pool of emissions allowances is established to address the potential for carbon price spikes. As before, the strategic reserve pool is funded using 1% of allowances from 2012-2019, 2% from 2020-2029, and 3% thereafter. The trigger price has been changed, however, so that in general reserve allowances will be auctioned if allowances prices reach 1.6 times (rather than double) their historical prices. There are limits on how much of the reserve pool can be drawn down in any one year. Proceeds from any reserve auctions will be used to purchase international forestry offset credits, which generally will be used at the same 1.25-to-1 ratio as other international offsets.  

Allocating and Auctioning Allowances.  The bill fills the largest gap in the discussion draft by distributing the emissions allowances to a variety of purposes and recipients.  While the auction component starts relatively small, it will grow steadily as most specific allocations phase out over the next two decades.  My colleague Dan Lashof has laid out the details here.  Briefly: 

• Consumer and job protection. The largest fraction of the allowances go for consumer protection (to electric and natural gas local distribution companies (LDC) as well as to low-income consumers) and to avoid shifting production - and the accompanying jobs and emissions - overseas in certain trade-sensitive and energy-intensive manufacturing industries. The LDC allocations should avoid the generator windfalls that occurred in the early stages of the European emissions trading program, but they could be improved to better promote cost savings through energy efficiency. The allocation to trade-sensitive industries also needs to be refined (see below). 
• Energy efficiency, renewables, and domestic adaptation. Other major slices of allowances go to states for money-saving energy efficiency and renewable programs, although a larger allocation to these objectives would further reduce the cost of curbing carbon. Some go to industries to promote new technologies such as carbon capture and storage, cleaner vehicle retooling, and efficient appliance deployment. Some allowances go to domestic natural resources adaptation programs. A greater investment in energy efficiency would help lower the costs of capping carbon. 
• International objectives. A portion of the allowances are made available for international objectives, including reducing deforestation, helping most vulnerable countries adapt to climate change impacts, and promoting clean technology exports. 

Auction Reserve Price.  The bill includes a new provision, originally recommended by USCAP, for a minimum price below which a portion of the allowances slated for auction will not be sold.  The minimum reserve price is set initially at $10 dollars per ton and rises 5 percent above inflation each year. 

Carbon Market Regulation - The bill names both the Federal Energy Regulatory Commission and the Commodity Futures Trading Commission as regulators to protect against market manipulation (only FERC was included in the discussion draft).  Key requirements are included to limit positions in auctions and derivative markets and to punish market manipulation.  The bill also goes far beyond carbon market regulation to give the CFTC new regulatory powers over financial derivatives.

Additional GHG Standards.  As before, new source performance standards (NSPS) are to be set for emission source categories not covered by the cap, using EPA's existing Clean Air Act authority.  EPA has to include enough uncapped sources so that 95 percent of all industrially-related emissions are covered by the cap or these supplementary standards.

HFCs. Separate limits and emissions allowances are established for hydrofluorocarbons (HFCs) under provisions of the existing Clean Air Act that regulate ozone-depleting chemicals.  The bill further accelerates the HFC reduction schedule provided in the discussion draft.  The vast majority of HFC allowances will be auctioned within 10 years. 

Black Carbon. The draft creates a program to reduce domestic and international emissions of black carbon.

Clean Air Act Modifications. The cap and trade program under the bill will be added as a new title of the Clean Air Act.  At the same time, the bill repeals some existing Clean Air Act authorities. 

• It retains unchanged provisions for regulating motor vehicle emissions and it creates new performance standards for coal plants (reviewed above). It modifies the current authority to set new source performance standards (NSPS) so that they will cover only sources outside the cap. It clarifies that in light of the national cap, there is no need for setting ambient air quality standards or hazardous air pollutant standards for greenhouse gases.  
• However, like the discussion draft, the bill contains an overly broad elimination of case-by-case review of whether large new sources should install state-of-the-art technology to curb greenhouse gas emissions (New Source Review). It would be sufficient to raise the threshold for this review to new sources emitting more than 25,000 tons of CO2 or an equivalent amount of other greenhouse gases.

State authority. In general, the bill strenuously protects state authority to establish clean energy, energy efficiency, and greenhouse gas control programs that are more stringent than federal requirements. The one exception, however, is a six-year suspension (from 2012 through 2017) of authority to impose state cap and trade programs. 

Title IV - Transitioning to a Clean Energy Economy

This portion of the bill fine-tunes a number of programs in the discussion draft to be funded using allowance allocations or revenue from auctions. 

Low-Income Consumer Assistance.  New provisions have been added to benefit low-income consumers above and beyond the consumer protection allocations made to electricity and natural gas local distribution companies.  Low-income families spend a higher percentage of their income on food, transportation, and other basic needs and are the most vulnerable to cost increases that may be reflected in prices for those products.  To address this, 15 percent of the allowances are to be auctioned every year and the revenue delivered to low-income families through a combination of existing delivery mechanisms such as tax credits and "energy refunds" delivered to bank accounts or through existing electronic benefits cards. 

Preserving Domestic Competiveness. Like the discussion draft, the bill employs the Inslee-Doyle proposal for transitional rebates to certain energy-intensive manufacturers of basic commodity products that are subject to strong international competition. The goal is to counter pressures to shift production, jobs, and emissions to countries that do not have comparable carbon emission reduction programs.  Rebates are intended to cover increased costs associated with both direct emissions and indirect emissions (if the latter are not covered by the allocation to local electricity distribution companies).  Rebates are based on an industry benchmark emission rate (e.g., tons of CO2 per ton of cement) and facility-specific output data (e.g., tons of cement produced).  Done right, this approach could promote investments in world-class efficiency that reduces emissions while also ensuring American competitiveness.  Some refinements in the proposal are needed, however.  

• The bill raises the benchmark emission rates to 100 percent of the pertinent sector's average emission rate, up from 85 percent in the discussion draft. Since most firms can pass on at least a part of the cost of purchasing allowances, this will result in an overly-large rebate for most firms and tend to shift production towards domestic companies. In addition, the rebates are slated to continue until at least 2025, even if cost disparities with other countries are eliminated before then by their joining in actions to curb emissions. The discussion draft had allowed the president to review the rebates as early as 2017, and to reduce them if appropriate in light of other countries' actions.  
• The legislation should be refined to better account for varying degrees of trade exposure from industry to industry, and also to respond to evolving international conditions, including international progress towards global warming pollution controls.Technical changes are also needed to assure that firms must be both energy-intensive and trade-exposed to be eligible for rebates, and to use contemporary data wherever possible.  

International Reserve Allowances.  The bill also provides for border adjustments if the rebate program does not adequately address competitiveness concerns.  U.S. importers of competing products would have to purchase special "international reserve allowances" to cover the emissions associated with those products.  The date on which such reserve allowances must be purchased was moved to 2025, from 2019 in the discussion draft.  Products from the least-developed and smallest-emitting countries would be exempt. 

Green Jobs and Worker Transition. The bill creates a program of worker training, education, and transition for jobs in renewable energy, energy efficiency and climate change mitigation.  It also provides compensation and health benefits, training and relocation support to qualifying workers whose jobs have been lost due to the effects of the legislation.

Domestic adaptation. The bill has expanded provisions for preparing for and adapting to human health and natural resource impacts of climate change that cannot be avoided. Funding is provided for these activities.   

• It establishes a climate change adaptation program within the U.S. Global Change Research Program and a National Climate Service within the National Oceanic and Atmospheric Administration (NOAA). States that adopt an EPA-approved adaptation plan are eligible for funds to implement such projects as responding to extreme weather events such as flooding or hurricanes, changes in water availability, heat waves, sea level rise, ecosystem disruption, and air pollution. 
• The bill requires the Department of Health and Human Services to develop plans to assist health professionals in preparing for and responding to the climate change health impacts.  
• The bill establishes a panel chaired by CEQ as a forum for interagency coordination on natural resources adaptation. The panel must develop a strategy for making natural resources more resilient to impacts from climate change and ocean acidification.

International Adaptation and Exporting Clean Technology. In addition to funding a program to reduce tropical deforestation, the bill provides allowance revenue to fund these two other key international needs.  Together with its deforestation component, the bill will enable the U.S. to engage other countries on three key elements of the international climate negotiations.

• The bill recognizes that global warming is a significant national and global security "threat multiplier." The most vulnerable countries, which have contributed little to global warming pollution, have the least capability to deal with its consequences. To address these needs, the bill provides allowance revenue for an International Climate Change Adaptation Program. The amount starts at 1% of allowances from 2012-2021, and increases to 2% for 2022-2026 and 4% for 2027-2050. Funding can be provided to these countries through bilateral assistance or multilateral funds and institutions agreed under an international climate agreement.  
• Recognizing that protecting Americans from global warming requires actions by all major emitters, the bill encourages developing countries to adopt emissions reduction policies and expand markets for American innovators' clean technologies. It provides allowance revenue to support an Exporting Clean Technology Program to encourage developing countries to take emission-reducing actions. The amount of allowances set aside is 1% from 2012-2021, increasing to 2% from 2022-2026 and 4% 2027-2050. In order to receive incentives, the developing country has to have entered into a multilateral agreement to undertake measurable, reportable, and verifiable emissions reduction actions, have put in place national policies and measures to reduce their emissions; and have developed a substantial emissions mitigation strategy. When developing countries need clean energy technologies, market opportunities will open up for U.S. companies. 

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Once again, my NRDC colleagues will post blogs over the next few days digging even more deeply into the American Clean Energy and Security Act.  We will do everything we can to support Chairmen Waxman and Markey in improving the bill and passing it through the Energy and Commerce Committee next week.