The American Clean Energy and Security (ACES) Act of 2009 has cleared one hurdle through passage by the House Energy and Commerce Committee. The bill now makes its way through at least two more House Committees before a floor vote will occur. The House leadership has set an aggressive time frame for passage, Speaker Pelosi has said the remaining Committees must finish their work by June 19th. This leads to the possibility of a floor vote no later than the end of the month or early July.
(World Resources Institute– Graph on anticipated reductions from ACES- click on chart to enlarge)
While the ACES legislation appears to be moving quickly, major issues remain with the structure of the legislation as well as its timing. The Senate does not have a companion bill and many speculate the Senate will be unwilling to simply take of the Waxman-Markey Bill. Therefore, a tremendous amount of uncertainty remains as to the approach the Senate will use to take up climate change legislation.
What are the possible issues that will be debated in House Committee hearings and in the Senate? Some will include the following:
- 5 year Phase Out of Allocations- The mark up version of the ACES legislation saw a significant compromise on the auction v. allocation debate. Whereas, the President had proposed a 100% auction, ACES only calls for a 35% auction in the early years. However, the bill still proposes an aggressive phase out of allocations for the energy sector. (See Pew Chart to Left that show dramatic shift downward in allocations during 2025-2030 – click on chart to enlarge) While it may seem like a long way off, in a five year period stretching from 2025-2030 the legislation phases out allocations moving to 90% auction of allowances. Industry is concerned that this aggressive phase out period will lead to price spikes in utility costs.
- 2020 Emission CAP– Emission reductions called for in the initial years was reduced. The first major milestone of the cap is seen as 2020. The original bill called for a 20% reduction below 2005 levels. The mark up reduced that to a 17% reduction by 2020. However, some forget that President Obama had called for a 14% reduction by 2020. There are many industry representatives who believe the early reductions still need to be softened to make the bill workable. There may be a renewed push to bring the 2020 cap down to the 14% reduction.
- 2012 Start Date- The Legislation calls for a modest 3% reduction in 2012. However, some in industry believe 2012 is too early and does not give adequate lead time to prepare for the cap. During an EMA presentation, Bruce Braine, Vice President of AEP, commented that the 2012 time frame may force switching to natural gas that will result in price spikes in the first year the cap is effective.
- International Offsets- In the face of widespread controversy regarding the European Trading Scheme (ETS) use of offsets, the bill includes many limitations on use of international offsets. Beginning in 2018, there is an automatic 20% discount in the value of international offsets. The bill limits use of international offsets to those categories of projects that have received approval by U.S. EPA. In addition, there is a sector limitation on use. Sectors in various countries will be identified where offsets are deemed appropriate (factors includes GDP and receiving equal treatment in project host country). Finally, there must a an applicable bi-national or multi-national treaty in effect with the Country. Industry is concerned that these requirements will reduce the availability of international offsets thereby driving up the cost of compliance.
- Environmentalist Perspective- The consensus among the environmental community appears to be that the "watering down" of the ACES legislation was necessary to secure passage. Therefore, even with the dramatic shift away from auction of allowances, most groups still support the Legislation. The key issue from an environmentalist perspective is the proverbial "line in the sand" to prevent additional changes, including concessions to industry on the issues mentioned above in the Senate.
- Ideology v. Realism- Republicans who have uniformly opposed the carbon cap and trade legislation. Even though industry support for the Legislation has grown, many Republicans have had success describing the Legislation as a large tax increase during a down economy. This message plays well even with some Democrats from the Midwest and Southern States that face the greatest impacts from climate change legislation. The "realism" aspect is that regulation of greenhouse gases appears inevitable. A market based solution is clearly a better alternative to command and control regulation under the Clean Air Act. However, are some members of Congress in denial that regulation is inevitable?
Obviously, ACES went through a dramatic transformation to gain passage from the House Energy and Commerce Committee. The overwhelming majority of changes were to address industry concerns with the Legislation. The most important changes were the shift away from auction of allowances and reduced reduction targets in the early years of the cap.
Additional battles may be looming in the House over the issues identified above and others. However, the most important battle ground remains the U.S. Senate where the future is less certain.