Lawmakers heard reactions this week to the 111th Congress’s first greenhouse gas cap-and-trade proposal, the likeliest so far to become law.

The 648-page American Clean Energy and Security Act of 2009 was the focus of hearings in the House of Representatives Committee on Energy and Commerce.

The bill, which would establish a cap-and-trade system on all large emitters of greenhouse gases, or GHG, was released on March 31 by Energy and Commerce Chairman Henry Waxman, D-Calif., and Energy and Environment Subcommittee Chairman Edward Markey, D-Mass.

In spite of the bill’s length, perhaps the most difficult issue was left, on page 478, “to be supplied.” That is: What part of the emissions allowances are to be auctioned, and what part given freely to emitters?



Cap and Trade History

“Cap and trade” got its start with the federal Environmental Protection Agency’s successful Acid Rain Program for controlling sulfur dioxide, or SO2, emissions.

Every year since 1995, the EPA has allocated allowances that permit one ton of SO2 emissions each to covered electricity generating units, using a formula based on historical fuel use.

The total number of allowances for a given year is that year’s “cap,” and allowances may be bought and sold or “traded.”

Every spring, the agency auctions a small number of additional allowances, establishing price information for the allowance market.

And at year-end, it collects from each covered facility allowances equal to the number of tons of SO2 emitted in that year.

Those failing to hold the required number of allowances are subject to stiff penalties: $3,337 per ton in 2008. That same year, allowances were auctioned for $390.

Over time, the cap has been reduced, resulting in lower total emissions.

The program is attributed with cutting SO2 emissions almost in half since 1990, according to EPA data — at a quarter of the cost the agency initially predicted and in a manner that regulators and industry alike agree has been efficient.

So when European Union regulators sought to reduce GHG emissions, they modeled their program on the Acid Rain Program.

Because the EU’s 2005 pilot GHG Emission Trading Scheme capped emissions from too few sources, some say the market was slow to start.

However, the full program, launched in 2008, shows signs of contributing to GHG emissions reductions, the New York Times reported earlier this month.



Allowances in

Waxman-Markey

The Waxman-Markey bill, also referred to as “ACES,” sets GHG emission reduction targets of 20 percent from 2005 levels by 2020 and 83 percent by 2050. That would leave emissions of about 5.7 billion tons in 2020 and 1.2 billion tons in 2050.

Because the program would cover entities responsible for only about 85 percent of emissions — electricity and fuel producers and importers beginning in 2012, industrial stationary sources in 2014 and natural gas local distribution companies in 2016 — the number of allowances proposed is less: 4.9 billion in 2020, for example, and 1 billion in 2050.

Those allowances represent trillions of dollars over the program’s 38 years.

The average price of EU market allowances traded in Germany in 2008 was about $31/ton, according to the German environment ministry; with the slower economy, allowances traded closer to $15 in the first quarter of 2009.

Ideas of a post-regulation U.S. market — analyses by regional grid manager PJM Interconnection and Duke Energy — range from $10 to $70/ton.

At those levels, 2020’s 5 billion allowances alone will be worth tens or hundreds of billions of dollars.

That means covered sectors have a lot at stake. If the government gives the allowances away, it’s a massive windfall for companies that can make early reductions; if it auctions them, it’s a massive cost.



Auction vs. Free

This week’s hearings will help lawmakers begin to decide that question, and they could settle on either or both.

In the Acid Rain Program, allowances are given away; for GHGs, President Obama has said he would auction all allowances.

However, Waxman-Markey takes as one of its starting points the positions developed by the U.S. Climate Action Partnership of major corporations and non-governmental organizations.

USCAP holds a mixed position on allowance distribution.

The group released a paper in January advocating the free allocation of allowance value, during a transitional period, to energy-intensive industries that compete globally, such as chemicals, oil refining and steel, as well as to competitive power generators and large stationary sources.

At the same time, the group advocates directing some allowance value to end-use energy consumers and low-income consumers, as well as to worker transition and technology development — which implies government-redirected auction proceeds.

USCAP members were scheduled to testify this week, as were representatives of the administration and of utilities.

Other Issues

Lawmakers have several other issues to resolve with regard to allowances. If allocated freely, how much will go to each covered industry? If auctioned, what will be done with the proceeds?

Another thorny issue is what is known as “offsets.” As drafted, the ACES allows emitters to replace about a third of allowances with offsetting emissions reductions, such as capturing methane emissions at a landfill somewhere or, maybe, planting trees. Some argue that offsets are not real reductions, and that issue surely got attention this week.

Finally, the ACES is not only a cap-and-trade bill but a broad attempt to unify U.S. energy policy toward reducing GHG emissions. It also covers clean energy technologies and energy efficiency. Details on all of that likely were discussed this week, as well.



Timeline

Waxman has targeted Memorial Day for getting a bill to the full House.

A competing bill introduced by Rep. Jim McDermott, D-Wash., — the Clean Environment and Stable Energy Market Act — has gotten less attention, but it would combine cap and trade and tax provisions to reduce GHG emissions.

The administration wants U.S. climate legislation before the United Nations Climate Change Conference in Copenhagen in December.