New Senate Greenhouse Bill Beefs Up Cost Containment
Published By: Energy Daily
May 22, 2008
A revised version of greenhouse gas cap-and-trade legislation set for Senate floor debate in early June includes a new provision aimed at containing industry compliance costs by making available additional greenhouse emission allowances for utilities and other covered emitters to ensure that prices for allowances and energy services won’t spike and harm the U.S. economy.
The new legislation, unveiled Wednesday by Senate Environment and Public Works Committee Chairman Barbara Boxer (D-Calif.), will serve as a substitute for legislation (S. 2191) by Sens. Joseph Lieberman (I-Conn.) and John Warner (R-Va.), and will be the vehicle for amendments when the Senate debate begins the week of June 2.
The substitute would shower on utilities, energy-intensive manufacturers, consumers and other stakeholders some $6.7 billion through 2050 in free allowance allocations and allowance auction revenues.
The new cost-containment language draws heavily from a proposal developed by staff of the National Commission on Energy Policy (NCEP) and the Nicholas Institute, an environmental think tank, but never approved by either of the two organizations’ governing boards. It also borrows from cost-containment provisions in climate change legislation by Senate Energy and Natural Resources Committee Chairman Jeff Bingaman (D-N.M.) and Sen. Arlen Specter (R-Pa.).
The substitute retains the emission reduction targets and timetables contained in the Lieberman-Warner legislation. The bill would impose an emissions cap on sectors representing 87 percent of total U.S. emissions beginning in 2012, require reductions of 19 percent below 2005 levels by 2020 and 71 percent below 2005 levels by 2050. The 2050 target amounts to a 66 percent duction in total U.S. emissions.
Since the bill’s introduction in October, utilities and other affected industry sectors have voiced strong concerns that the 2020 cap is too stringent because it would come before the commercial availability of technology to capture and store carbon dioxide emissions from coal-fired power plants and other fossil-fuel combustion sources.
Utilities and manufacturers have warned that if carbon-capture and storage (CCS) technology is not available by 2020, the cap in that year could force utilities to switch from coal to natural gas, driving up gas demand and prices. The new cost-containment provisions, hammered out after weeks of negotiations by Boxer, Warner, Lieberman and other senators, are a direct response to those concerns.
The substitute would create a reserve or pool of allowances borrowed from future compliance years that would be made available to covered entities. Initially, from 2012 through 2027, the federal government would be required to administer annual "cost-containment" auctions of allowances drawn from the pool. The pool in 2012 would contain 7.5 percent of the total allowances created by the legislation, but that percentage would decrease annually over time.
In the first of these annual auctions, allowances would have a floor price set between $22 and $30; the actual floor price would be established by the president two years after the bill is enacted. In each year thereafter through 2027, the floor price would be the product of the previous year’s floor price multiplied by the annual inflation rate plus a small adder.
The escalating floor price is intended to ensure that regulated entities do not use the cost-containment auction to scoop up large amounts of relatively low-cost allowances for use in later years, when the price of "regular" allowances would be expected to be significantly higher. In addition, the escalating floor price is meant to mirror the expected gradual increase in allowance prices over time as the stringency of the cap increases.
Using allowances borrowed from the future to fill the cost-containment pool is intended to ensure that the integrity of the emission caps is not compromised, a key requirement of environmental organizations that utilities and other sources support in principle.
However, several sources observed Wednesday that the initial size of the pool—7.5 percent of the total amount of allowances—may be too small to adequately address potential allowance price spikes. The NCEP-Nicholas Institute staff proposal called for the pool to comprise 10 percent of the total number of allowances.
In 2012, roughly 73 percent of the total number of emission allowances would be allocated free of charge to emission sources and other entities, with the remaining 27 percent sold by the government in regular auctions. Over the next 20 years, the amount of allowances allocated free of charge would decrease, and the amount sold in regular auctions would increase, such that by 2032, 27 percent would be allocated free of charge and 73 percent sold at auction.
Allowances that remain unsold at the end of the regular auction would be used to replenish the cost-containment pool.
The cost-containment auction expires after 2027, at which time CCS technology for coal-fired power plants is expected to be widely available.
However, the bill would establish a "carbon market efficiency board" with authority to intervene in the allowance market if it judges that allowance prices are high enough to threaten the economy. The board could increase the amount of allowances regulated entities could borrow from the future and expand the period during which an entity could repay the allowances it has borrowed, among other market intervention tools.
The original legislation would have allowed covered emitters to use emission offsets—emission reductions that occur in sectors of the economy not covered by the emission cap—to meet up to 30 percent of their compliance obligations. Fifteen percent of the offsets could come from domestic sources and 15 percent from foreign countries, such as members of the European Union, that are subject to government-imposed emissions restrictions.
In a major change, the substitute would allow covered entities to use "project-based" credits for up to 5 percent of their obligations, and to use international credits earned by protecting forests for up to 10 percent of their obligations.
The changes in the international offset provisions are expected to sharply reduce compliance costs for U.S. utilities and other emissions sources.
