American Clean Energy and Security Act of 2009 – Title III: Global Warming Pollution Reduction Program

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On June 26, 2009 the House of Representatives passed the American Clean Energy and Security Act (ACES) of 2009, a combined energy and climate bill representing our first real chance for a national carbon reduction plan in the United States. The bill combines standards and incentives to promote clean energy and energy efficiency technologies with a firm cap on greenhouse gas emissions. The Alliance will continue to work to obtain Senate passage of strong climate legislation.

• Title I: Clean Energy
• Title II: Energy Efficiency
• Title III: Global Warming Pollution Reduction Program
• Title IV: Transitioning to a Clean Energy Economy
• Title V: Agricultural and Forestry Related Offsets

Title III: Global Warming Pollution Reduction Program

This title establishes, within the Clean Air Act, a nation-wide cap-and-trade program referred to as the Safe Climate Act. Economy-wide reduction goals for the Safe Climate Act are 3% by 2012, 20% by 2020, 42% by 2030, 83% by 2050, based on 2005 emissions.

Scope

The cap established in the Safe Climate Act applies to about 85% of U.S. greenhouse gas emissions. The reduction targets for regulated entities, which are based on 2005 emissions, begin with 3% reductions by 2012, 17% by 2020, 42% by 2030 and 83% by 2050. Special programs address emissions from HFCs and black carbon.

Regulated Entities

Electricity generators, liquid fuel refiners and importers, and fluorinated gas manufacturers are covered starting in 2012. Industrial sources that emit more than 25,000 tons of CO2e per year are covered starting in 2014. Local natural gas distribution companies are covered starting in 2016.

Environmental Protection Agency (EPA) is to establish emission standards on various sources not covered by the program as well as new coal fired power plants.

Price Stability and Cost Control

Trading and banking of emissions allowances may occur in unlimited quantities. Additionally, a regulated entity may borrow emission allowances from one year ahead without penalty, and can borrow from two to five years ahead to cover up to 15% of its obligation with restrictions at an 8% interest rate for each year between the year borrowed and the vintage year of the allowance.
Offsets: Regulated entities can use verified offsets (greenhouse gas reductions outside the scope of the cap) not exceeding an economy-wide total of 2 billion tons per year, divided evenly between domestic and international sources. A 20% discount is applied to international offsets after 2018. EPA is to determine the types of eligible offset projects in consultation with other Federal agencies and an Offsets Integrity Advisory Board, comprised of nine experts (mainly scientists), but the crediting period for each project is not to be less than 5 and greater than 10 years for all project types other than those involving sequestration. Project developers can petition for new crediting periods with limitations. The bill specifies minimum additionality requirements and directs EPA to establish a process for accrediting third party verifiers and to establish measurement methodologies. The EPA is to oversee all offsets programs except those applying to domestic agriculture, which the United States Department of Agriculture is to oversee.

In addition, a strategic reserve of 1% of allowances each year from 2012 through 2019, 2% from 2020 through 2029 and 3% from 2030 through 2050 is to be set aside for auction to regulated entities to cushion the market in case the allowance prices rise faster than projected. A minimum strategic reserve auction price is to be set at $28 in 2012, increasing at 5% plus the rate of inflation for 2013 and 2014, and 60% above average cost of that year’s allowances.

Allowance Allocation

The American Clean Energy and Security Act would direct the EPA to allocate emissions allowances to various entities to accelerate emissions reductions or ease transitional effects. The emissions allocations are as follows:

Electricity Local Distribution Companies (Added to Section 782(a) and 783 of the Clean Air Act) – ACES directs the EPA to allocate emissions allowances for local distribution companies (LDCs) in the following schedule:

Allowances are to be distributed among LDCs according to the following formula: half distributed ratably based on the annual average GHG emissions attributable to electricity generation for an established base period prior to 2013; half distributed ratably based on the product of the changing number of consumers each year and the average electricity use per consumer in an established base year prior to 2012. This section requires that no LDC receive a greater allowance value than necessary to offset any increased electricity costs due to the enactment of the bill, in which case extra allowances are to be redistributed ratably by GHG emissions of the remaining entities. Section 783(B)(5) requires that emission allowances distributed to LDCs be used "exclusively for the benefit of retail ratepayers." A portion of this funding will go to merchant coal and long-term contract generators.

Small Electricity Local Distribution Companies (Added to Section 782(a) and 783 of the Clean Air Act) – ACES directs the EPA to allocate emissions allowances to small local distribution companies in the following schedule:

Allowances are to be distributed among small LDCs based on historic emissions. This section requires that small LDCs use the allowances to achieve electricity savings, deploy renewable electricity technologies, or provide low-income assistance programs.

Natural Gas Local Distribution Companies (Added to Section 782(b) and 784 of the Clean Air Act) – ACES directs the EPA to allocate emissions allowances to natural gas utilities according to the following schedule:

Allowances are to be distributed among natural gas utilities based on historical emissions for the first seven years of the program, and based on the product of historical emissions per customer and number of customers in each three year period thereafter. This section requires that the allowances are used “exclusively for the benefit of retail ratepayers,” and that no less than one third of the allowances be used for energy efficiency programs for natural gas consumers.

Home heating oil, propane and kerosene (Added to Section 782(c) and 785 of the Clean Air Act) – States receive allowances based on their residential and commercial consumption of oilheat fuel according to the following schedule:

Allowances are to be distributed to states ratably based on the carbon content of home heating oil sold to consumers in each state in the preceding year.  States must use at least one-half of these allowances for energy efficiency programs and the remainder for direct financial assistance program for consumers.

Distribution to Consumers: For emissions allocations used to provide rebates to consumers in any of the three sections above – electricity, natural gas and home heating oil – the bill requires that allowances cannot be based solely on the quantity of energy used by each ratepayer. Rather, customer rebates must be based on a fixed rate, to the maximum extent practicable. An exception exists for industrial ratepayers, however, wherein an LDC may pass on allowances values to retail industrial ratepayers based on the quantity of electricity delivered.

Energy Efficiency and Renewable Energy: (Section 782(g) of the Clean Air Act) ACES directs DOE to establish State Energy and Environmental Development (SEED) accounts to be used by state and local governments for energy efficiency and renewable energy programs (see Sec. 131 and 132 above for more on SEED Accounts).  Allowances are provided to the SEED accounts according to the following schedule:

Additionally, 0.5 percent of the totalallowance value is to be allocated to states to support building code development and enforcement efforts, under section 201 of this act.

Research and Development: (Added to Section 782(h) of the Clean Air Act). ACES directs the EPA to allocate 1.5% of total emissions each year to research and development. 0.45 percent of the emission allowances will be distributed to Clean Energy Innovation Hubs (section 171), and 1.05 percent of the emissions allowances will be distributed to the DOE program on Advenced Research Project Agency – Energy (ARPA-E) funds.