David Doniger posted an overview based on NRDC’s “first read” of the Kerry-Lieberman American Power Act discussion draft. Here I will delve more deeply into the environmental integrity of the core emission limits in the bill.

There is good news here. While the reductions fall well short of what the latest science suggests is needed, and we have some concerns about the price collar, offsets, and biomass (see below), the bill would establish, for the first time, effective national limits on global warming pollution. Those limits would get tighter every year and would drive investments in clean energy that create jobs and begin to end our dangerous addiction to oil.

Doniger’s post summarizes the core emission limits in the bill:

Pollution Limits: The bill requires global warming pollution reductions for the sectors that are covered by emission limits, commencing in 2013 (sec. 2001, creating new Clean Air Act sec. 703): 

Year                               Reduction Targets for Covered Sources (below 2005 levels)

2013                              4.5 percent

2020                              17 percent

2030                              42 percent

2050                              83 percent

The program begins in 2013 by covering emissions from power plants and the combustion of gasoline and other petroleum products. Emissions from large industrial facilities and natural gas combustion are added in 2016, and from that point forward the emission limits would cover about 85 percent of total U.S. heat-trapping pollution output.

The effectiveness of these pollution limits depends on the provisions for (A) enforcement, (B) cost containment, (C) offsets, and (D) the treatment of biomass. I will discuss each of these in turn. The scientific review provisions are also important to drive needed improvements to the program over time, and I will conclude by looking at that section.

Before diving in, I want to comment on a disturbing tendency to judge a bill by its page count. Opponents of the American Power Act will undoubtedly decry the fact that it is 987 pages long. This may be the only fact that many of them get right about the bill. They will neglect to mention that these are legislative pages that are triple-spaced in 14 point font, a legacy of when legislation was marked up by hand. More importantly, they won’t bother to note that the core program rules (sections 721-729) run to only 57 legislative pages (pp. 310-366 of the discussion draft). The rest of the bill defines the offsets program, allowance allocations, competitiveness provisions, international activities, and complementary programs to deploy low-carbon technologies. Some of these provisions are expendable, and others undoubtedly could be streamlined, but by-and-large these extra pages are substantively important and politically essential. It is certainly possible to write a short climate bill, but I doubt that it is possible to enact one.

A. Enforcement

A fixed number of “emissions allowances” is created for each year from 2013 through 2050, reflecting the annual emission reduction targets listed above (sec. 721). Each covered source must surrender one allowance for each ton of pollution they are responsible for. (A loophole for emissions from burning biomass needs to be closed; see below.) 

Petroleum refiners and importers obtain the emission allowances they need in a slightly different way than other sources, but the result is environmentally equivalent. Producers and importers of gasoline and other petroleum fuels must purchase allowances from EPA on a quarterly basis to cover the emissions from the combustion of fuels they sold during that period. These allowances may not be traded or banked. Their price is pegged to the allowance auction price from the previous quarter (sec. 729). The environmental integrity of the emission limits is maintained because these allowances come out of the fixed pool established for each year.

Any covered source that emits a ton of greenhouse gases without holding a corresponding emission allowance has to pay a penalty equal to twice the market price for allowances, in addition to making good on each missing allowance (sec. 723).  

B. Cost containment

The bill includes a price collar designed to limit emission allowance price volatility and ensure that allowance prices fall within a specified range. The upper bound of this price collar starts in 2013 at $25/ton and rises by 5 percent per year above the rate of inflation. The lower bound starts at $12/ton and increases by 3 percent per year above the rate of inflation.

The bill is designed to keep allowance prices within the collar without compromising its emission limits. For the low side this is easily accomplished by setting a minimum bid price in the allowance auction (similar to the way many eBay auctions are structured). To prevent prices from exceeding the upper bound, the bill creates a large reserve of emissions allowances (drawn from future year allocations and offsets) that can flow into the marketplace if unexpected carbon price spikes take place. Covered sources can obtain up to an additional 15 percent of their emissions in any year at the fixed upper bound price for that year. EPA is directed to replenish the reserve (if it is used at all) using the proceeds from allowance sales to purchase extra offsets. The reserve provides an extra layer of protection for consumers against unexpected cost increases and price volatility while preserving the integrity of the emission limits (Sec. 726). 

If the reserve is tapped on a routine basis it is possible that it will eventually be depleted, creating pressure to simply mint additional allowances and undermine the integrity of the emission limits. While this is unlikely given the wealth of low-cost emission reduction and offset opportunities, the upper price collar should begin at a higher value (e.g., $30/ton) and escalate faster (e.g., 7 percent per year) to further minimize this risk. The minimum price should also escalate faster to give greater certainty to investors in clean energy.

EIA’s analysis of the House energy and climate bill underscores the importance of increasing the upper price collar faster. In its core case, EIA projects allowance prices of $20/ton in 2013 (adjusted to 2009 dollars), which falls comfortably within the price collar. EIA projects, however, that allowance prices will increase by 7 percent per year. With the upper bound of the price collar increasing by only 5 percent per year, this means that the expected price would exceed the price collar starting in 2023.