WASHINGTON INSIGHT

America's Climate Security Act: Debate on federal comprehensive climate change legislation begins

Julia Anastasio, Esq.
Senior Manager of Government Affairs
American Public Works Association
Washington, D.C.

Congress is preparing to take up the issue of climate change and global warming this month. While it is unlikely that climate change legislation will be passed by Congress this session and signed into law by the current President, consensus is coalescing around the belief that some form of climate legislation will be implemented sometime in the next three to five years. Public works practitioners need to be aware of both the challenges and opportunities presented by this historic piece of environmental legislation. As the debate shifts to Washington, D.C., public works managers and professionals need to be aware of the debate so that you are poised to recognize the impacts these decisions will have on your operations and capitalize on the opportunities that will arise as a national, economy-wide approach to climate change is debated, developed and implemented. Each public works department should begin to carefully identify, evaluate and plan for dealing with any new climate change regulatory regime.

While the federal government has been slow to develop a national policy on climate change, many states and local governments are stepping in to fill the void and taking actions to address the issue. States and local governments are setting ambitious emissions reduction targets, requiring increased investment in energy efficiency, mandating use of renewable fuels and developing plans to adapt and mitigate the impacts of climate change. As a result, many local public works departments are being asked by local elected leaders to demonstrate how the department is working to mitigate and adapt to challenges such as water shortages and increased flooding risks posed by climate change. Government officials point to a variety of reasons for initiating these innovative and early actions, including reducing and preventing harm to local resources and residents, promoting economic development, reducing vulnerability to increased energy prices and promoting a sense of goodwill. As this patchwork quilt of rules grows, many industry leaders, environmentalists and the public are clamoring for a comprehensive national approach to climate change.

Congress is beginning to hear these cries and the crises of environmentalists who say something must be done now to combat the effects of global climate change and is preparing to begin debating the most comprehensive and far-reaching environmental law considered by federal policy makers since the rise of environmental protection laws enacted in the 1970s. After years of ignoring the issue, federal policy makers are taking preliminary steps, such as preparing the first comprehensive piece of cap and trade legislation, issuing white papers on designing a new program and holding hearings with scientific and environmental experts, toward enacting a mandatory economy-wide climate change program. Prospects for passage this year remain uncertain. The Senate has taken the lead in crafting comprehensive climate change legislation and is poised to begin debating the America's Climate Security Act (S.2191) (Lieberman-Warner) in June.

On December 5, 2007, the U.S. Senate Committee on Environment & Public Works (EPW) marked up and voted 11-8 to report the Lieberman-Warner Climate Security Act to the full Senate. As expected, the vote was upon party lines, with Senator John Warner, Republican co-sponsor of the bill, the lone Republican voting for the bill. The Lieberman-Warner bill caps emissions of the six primary greenhouse gases, carbon dioxide, methane, nitrous oxide, sulfur hexafluoride, hydroflurocarbons and perflurocarbons. The cap over those sources starts at the 2005 emissions level in 2012 and then lowers year by year at a constant, gradual rate, such that it reaches the 1990 emissions level in 2020 (15% below the 2005 emissions level) and 65% below the 1990 emissions level in 2050 (70% below the 2005 emissions level). The stated purposes of the bill are: (1) to establish the core of a federal program that will reduce the U.S. greenhouse gas (GHG) emissions substantially enough between 2007 and 2050 to avert the catastrophic impacts of global climate change and (2) to accomplish that purpose while preserving robust growth in the U.S. economy and avoiding the imposition of hardship on U.S. citizens. The bill covers the electric power, transportation and manufacturing sectors that together account for 75% of U.S. GHG emissions. In addition to the declining emissions cap, the bill strengthens energy efficiency standards for appliances and buildings in order to address commercial and residential sector emissions.

Under the bill, each covered facility annually must submit to the Environmental Protection Agency (EPA) a number of emissions allowances that accounts for all of the carbon dioxide equivalents that the facility emitted that year. A carbon dioxide equivalent is the quantity of GHG emissions that EPA determines makes the same contribution to global warming as one metric ton of carbon dioxide. Covered facilities include: (1) fossil fuel-fired electricity generating units and industrial facilities that emit more than 10,000 carbon dioxide equivalents per year; (2) any entity with an annual production or imports of petroleum- or coal-based transportation fuel, the use of which would result in emissions of more than 10,000 carbon equivalents per year; and (3) entities with an annual production or importation of non-fuel chemical that emits more than 10,000 carbon dioxide equivalents. The entities meeting the definition of covered facility are currently responsible for 75% of U.S. total GHG emissions.

The two-fold approach established by the Lieberman-Warner bill attempts to control compliance costs by allowing covered facilities to trade emissions allowances and credits. The cap and trade mechanism established by the bill allows entities to trade, save, sell and borrow emissions allowances and use offset credits to meet their emissions limits each year. Offset credits are generated when non-covered entities, such as farms and non-covered businesses, reduce their GHG emissions or capture and store GHG emissions. At the end of each calendar year, beginning in 2012 and ending in 2050, owners and operators of each covered facility will need to submit to EPA one emission allowance for each carbon dioxide equivalent that (1) was emitted by that facility during the previous year; (2) will be emitted from the use of any petroleum- or coal-based transportation fuel that was produced or imported at that facility during the previous year; and (3) will be emitted from any non-fuel chemical that was produced or imported at that facility during the previous year. Each emissions allowance will have a unique serial number and submitted allowances will be immediately retired by EPA once they are turned in.

The Lieberman-Warner bill also allows for the buying, banking and selling of emissions allowances. For instance, owners and operators of covered facilities may hold onto allowances for as long as they wish to maintain a reserve of allowances for use in later years. In addition, covered facilities may satisfy up to 15% of a given year's emissions limit with credits borrowed from future years. Offsets and credits are the analog to emission allowances. Offset allowances are created when EPA certifies that a non-covered facility, such as a local government entity or operation, has taken actions to either reduce the number of carbon dioxide equivalents that the facility otherwise would have emitted in that calendar year or has increased the number of carbon dioxide equivalents that the facility otherwise would capture from the atmosphere and store in that calendar year. The bill also allows covered facilities to satisfy up to 15% of a year's compliance obligation with international credits. An international credit is an emissions allowance purchased from a foreign GHG trading market that was previously certified by EPA. EPA will need to promulgate regulations allowing owners and operators to satisfy current compliance obligations with offset allowances and international credits and establish guidelines and procedures to ensure that activities certified as offsets are verified, monitored, permanent and enforced.

The bill directs EPA to establish an emissions monitoring and reporting system and charges the agency with running the new program. At the inception of the program, EPA will create all of the emissions allowances that will exist over the life of the program. At the beginning of each year, EPA is directed to divide up and distribute the allowances comprising that year's emissions allowance account (EAA). The EAA represents each year's emissions cap and is made up of billions of individual permits. Each permit allows the bearer to emit one carbon dioxide equivalent. EPA is directed under the bill to establish a separate quantity of emissions allowances for each calendar year from 2012 to 2050. The size of each year's account is laid out in the text of the bill. For instance, the size of the 2012 account is 5.2 billion allowances, or the number of carbon dioxide equivalents that covered facilities emitted in 2005. The number of allowances in any given year's account is 96 million fewer than the number in the immediately preceding year's account. The size of the 2020 account is 4.43 billion allowances, or the number of carbon dioxide equivalents that facilities emitted in 1990. The 2050 account is 1.56 million allowances or 70% below the number of carbon dioxide equivalents emitted by covered facilities in 2005, or 65% below the amount they emitted in 1990. (U.S. Climate Action Partnership).

The Lieberman-Warner bill also establishes a Carbon Market Efficiency Board to monitor the emissions trading market and to make modifications to the program if it looks like the economy is suffering. In the event that the average daily closing price of an emissions credit exceeds a pre-set limit, within the first two years of the program the Board may increase the percentage of a covered facility's annual compliance obligation that may be satisfied with borrowed emissions allowances and offset credits. In all subsequent years, the Board may temporarily increase the amount covered facilities may borrow or extend the payback period of loans, lower interest rate on loans and loosen a given year's economy-wide emissions cap by as much as 5%, provided subsequent years' caps are tightened to ensure that cumulative emissions reductions over the life of the program remain unchanged. These modifications are only authorized as needed to avoid significant harm to the nation's economy.

The Lieberman-Warner bill gradually changes over the first 25 years of the cap and trade program, in both the types of entities receiving free allowances and the percentage of the annual account that various entities receive. In 2012, the first year of the program, 76% of the allowances for the year would be given away and 24% will be auctioned off. However, by 2036, only 27% of the allowances for that year will be allocated at no-cost and 73% will be auctioned off. The total number of allowances for each of the years is 5.2 billion and about 2.9 billion, respectively. Allowances will be divided within each sector on the basis of historical emissions levels. The initial 20% of allowances are set to decline by 1% per year, until it reaches zero in 2036. Each year, 10% of that year's allowances will be allocated to electric distribution utilities, with the amount of allocations for each entity based on the amount of electricity sold to consumers. Entities receiving allowances will be required to pass through the value of the allowances received to low income and middle income consumers and to promote energy efficiency and conservation. Beginning in 2012, 18% of the allowances will be auctioned off, with each year's percentage of allowances auctioned increased as the amount of total allowances decreases, until it reaches 73% in 2036.

The remaining balances of allowances are for auction under the bill. The bill establishes the Climate Change Credit Corporation as the vehicle for direct auction of all allowances. Moreover, the bill directs the Corporation to annually use the auction proceeds for public-private partnerships to commercialize and spur development of: (1) low or zero emissions electric power sector technologies, including carbon dioxide capture from electricity generated from coal; (2) geological sequestration technologies; (3) 20% for commercializing low or zero GHG emitting transportation sector technologies, including reducing vehicle miles traveled; (4) mitigate the impact of climate change on wildlife and America's great waters; (5) promote the deployment of technologies to reduce sulfur dioxide, nitrous oxide, and mercury emissions from coal-fired power plants; (6) for state and local governments to mitigate the impact of climate change on economically disadvantaged communities; and (7) for international global climate change relief measures. The proceeds generated by allowance auctions will be distributed to several new funds established by the bill—the Energy Assistance Fund, the Adaptation Fund and the Climate Change Worker Training Fund. Additionally, the bill allows for early action awards where covered facilities are awarded allowances for actions taken since 1994 to reduce GHG emissions. In 2012, 5% of allowances will be available for early action awards, and the total percentage of available allowances would decline by 1% per year. Finally, a minimum of 5% of each year's allowances would be allocated to state governments, with an additional 1-4% available depending on various actions taken by the state.

State governments will receive allowances based on a formula that includes Low Income Home Energy Assistance Program expenditures, population and historic carbon dioxide emissions. Under the bill, states are directed to return or use at least 90% of the allowances they receive to mitigate impacts of climate change regulations on low income consumers. States are encouraged to promote programs such as energy efficiency and conservation including waste minimization and recycling programs; improve public transportation and passenger rail service; encourage advances in carbon dioxide sequestration technology; address local or regional impacts of climate change; mitigate obstacles to invest by new electricity generation markets; address local or regional impacts of climate change policy; and fund rural, municipal and agricultural water projects that are consistent with sustainable use of water resources.

Senator Barbara Boxer, Chair of the EPW Committee, is committed to bringing the Lieberman-Warner bill to the Senate floor this month. She has pledged to personally work with Senators Lieberman and Warner in securing the votes necessary to begin debate on the bill. She will confront several important procedural test votes, and in order to overcome her opponents she will need to persuade at least nine Republicans, with no defections from Democrats, to clear the 60-vote hurdle to close debate on the bill. Supporters of the bill must overcome opponents who either have reservations about the bill as currently drafted or those who staunchly oppose any legislation addressing climate change. Senator Boxer has stressed that she will not allow the legislation to be weakened with amendments and would rather hold the bill until 2009 if that seems like a possibility. According to one Senate aid, the Lieberman-Warner bill has a better than 50% chance of getting the votes needed to pass this year.

The House of Representatives is proceeding at a more measured pace in developing a House climate change bill. In January 2007, Speaker Nancy Pelosi established the Select Committee on Energy Independence and Global Warming to raise the visibility of energy consumption and global warming. The Select Committee does not have legislative jurisdiction but rather will focus on developing recommendations on policies, strategies, technologies and other innovations intended to reduce dependence on foreign sources of energy and other activities which contribute to climate change. To date, Chairman Markey has held a series of twelve hearings on the issue, including hearings with scientific and environmental experts, oversight investigations of the EPA, and discussions of the economic risks of global warming and impact of a cap and trade program. In addition to the activities of the Select Committee, Speaker Pelosi directed all House committees with jurisdiction over energy, environment and technology to prepare global warming and energy legislation. The Speaker set a goal of introducing comprehensive legislation so that it is ready for a floor vote by July 4, 2008, "so that this year, Independence Day is also Energy Independence Day." (Nancy Pelosi, Statement at Science and Technology Hearing on Global Warming, 2/8/2007). The House Energy and Commerce Committee is responsible for compiling all of this information and drafting the House legislation. In preparation for a bill, the Energy and Commerce Committee has been conducting a series of hearings and has issued several white papers addressing some of the unresolved issues within the global warming debate. The committee has not yet released a House climate change bill.

As Congress gears up to begin debating a comprehensive national economy-wide approach to addressing climate change, several unresolved issues are sure to generate significant debate. For instance, questions of how to control implementation costs for covered facilities over who should receive free allowances, how many allowances should be auctioned off versus given away, and what is the relationship between this bill and international climate change efforts. Moreover, questions over the percentage of offsets that can be applied by covered facilities each year to meet emissions limits, whether local governments should get credit for historic emission reduction activities and whether a new federal program will preempt existing state and local climate change efforts, will need to be resolved by federal policy makers before any new plan is adopted. The most controversial aspects of the proposed bill, such as the number of free allowances given away versus auctioned, inclusion of additional nuclear power provisions, inclusion of a safety valve that places a ceiling on carbon dioxide prices and additional support for low income rural consumers, are expected to generate the most debate and each could threaten to defeat the bill.

As the congressional debate heats up, public works professionals need to monitor the debate so that you are aware of the opportunities created by a new regulatory regime and recognize the potential impact of a comprehensive climate change program on your operations. The most obvious impacts to public works departments include direct impacts on infrastructure and services public works departments build, operate and maintain, from flooding, water shortages, coastal erosion and increased costs in supplies and fuel. Moreover, under the Lieberman-Warner framework, public works departments managing large public fleets will be regulated under the cap and trade rules. Less obvious impacts include fulfilling the expectations of local leaders and from the customers they serve. Over 800 mayors have already joined the U.S. Mayors Climate Protection Agreement and are looking to public works departments to take the necessary actions to meet these goals. Furthermore, new federal and state regulatory mandates are also adding to the pressures confronting public works departments. Finally, once a comprehensive national framework is established, city councils or managers will look to public works departments to establish historic early action activities in an effort to generate offsets for sale on the carbon market or to meet their own emissions limits.

A new comprehensive national climate change framework will provide public works managers with several opportunities including the opportunity to help shape the federal debate and the program as it is developed. Under the proposed framework established under the Lieberman-Warner bill, local governments and public works departments will likely be able to generate offsets through activities such as waste minimization and recycling programs, increased access to public transit, green building programs and water projects. These public works departments will either be able to use the credits to offset their emissions limit for the year or sell on the carbon market to generate needed revenue for vital community projects.

While prospects are slim for the enactment of comprehensive climate change legislation this year, public works managers need to begin identifying, evaluating and planning for dealing with a new regulatory regime. As the debate shifts to Washington, D.C., public works managers and professionals need to be aware of the debate so that you are poised to recognize the impacts these decisions will have on your operations and capitalize on the opportunities that will arise as a national, economy-wide approach to climate change is debated, developed and implemented. Public works departments are on the front lines of adapting to and mitigating the impacts of global climate change and are poised to take the lead in confronting this challenge.

Additional information is available at www.apwa.net/Education/symposium.asp.

Julia Anastasio can be reached at (202) 218-6750 or janastasio@apwa.net.