Climate Change Gets Specific – Climate Change Gets Specific – Evolution of Legislation and ACESEvolution of Legislation and ACES

Victor B. Flatt, Victor B. Flatt, Tom and Tom and Elizabeth Taft Distinguished Elizabeth Taft Distinguished Professor of Environmental Law, Professor of Environmental Law, UNC-Chapel Hill; Distinguished UNC-Chapel Hill; Distinguished Scholar GEMIScholar GEMI

Evolution of Cap and Trade BillsEvolution of Cap and Trade Bills

McCain-LiebermanMcCain-Lieberman Lieberman-WarnerLieberman-Warner Dingell-BoucherDingell-Boucher Waxman-Markey (ACES), passed out of Waxman-Markey (ACES), passed out of

house in June.house in June.

Important Issues in Federal Cap & Important Issues in Federal Cap & TradeTrade

Target, and target timelineTarget, and target timeline How will GHG allowances be allocatedHow will GHG allowances be allocated How much of the economy coveredHow much of the economy covered Adaptation fundingAdaptation funding Offset definition and restrictionsOffset definition and restrictions ““Safety” ValveSafety” Valve Who will AdministerWho will Administer Pre-emption and Benefits of Early ActionPre-emption and Benefits of Early Action

Senate Timeline and PoliticsSenate Timeline and Politics

Originally scheduled vote before August recess – Originally scheduled vote before August recess – now Septembernow September

Looking for Republican co-sponsorsLooking for Republican co-sponsors– Snowe, Collins, Murkowski, McCain, GrahamSnowe, Collins, Murkowski, McCain, Graham– Alexander seems to be outAlexander seems to be out

60 votes possible (3 democratic defections 60 votes possible (3 democratic defections predicted with high certainty – Nelson, Landrieu, predicted with high certainty – Nelson, Landrieu, Byrd)Byrd)

Compromises necessary?Compromises necessary? Alaska funding; possible natural gas role?Alaska funding; possible natural gas role?

U.S. Federal LegislationU.S. Federal Legislation

Waxman- Markey (now ACES) voted out of Waxman- Markey (now ACES) voted out of househouse

Important DetailsImportant Details– CoverageCoverage– Target ReductionTarget Reduction– AllocationAllocation– Administrative Oversight and MarketAdministrative Oversight and Market– OffsetsOffsets

Target GoalsTarget Goals(G-8 agrees to 2 C rise limit)(G-8 agrees to 2 C rise limit)83% reduction of 2005 levels by 205083% reduction of 2005 levels by 2050

17% reduction of 2005 levels by 202017% reduction of 2005 levels by 2020– Initial draft had 20% by 2020Initial draft had 20% by 2020– New draft claims with additional controls outside cap, New draft claims with additional controls outside cap,

will still reach 20%will still reach 20%– IPCC recommends 25-40% below 1990 levels by IPCC recommends 25-40% below 1990 levels by

2020, but goal is only about 7% below 1990 levels by 2020, but goal is only about 7% below 1990 levels by 2020.2020.

– EU looking at 25%EU looking at 25% Large CoverageLarge Coverage

– Over 85% of emissionsOver 85% of emissions

ACES How AllocatedACES How Allocated

15 % auctioned per year15 % auctioned per year Initially, other percentage given awayInitially, other percentage given away Approx. 59% to industry; 25% for Approx. 59% to industry; 25% for

needs/interest of public- adaptation, enviro, needs/interest of public- adaptation, enviro, etc…etc…

Annual allowances (in millions) Annual allowances (in millions) (sec. 721)(sec. 721)

YEARYEAR ALLOWANCESALLOWANCES2012 2012 4,6274,6272013 2013 4,5444,5442014 2014 5,099 *INC COVERAGE5,099 *INC COVERAGE2015 2015 5,0035,0032016 2016 5,482*INC COVERAGE5,482*INC COVERAGE2017 2017 5,3755,3752018 2018 5,2695,2692019 2019 5,1625,1622020 2020 5,0565,0562021 2021 4,9034,9032022 2022 4,7514,7512023 2023 4,5994,5992024 2024 4,4464,4462025 2025 4,2944,2942026 2026 4,1424,1422027 2027 3,9903,9902028 2028 3,8373,83720292029 3,6853,6852030 2030 3,5333,533

YEAR ALLOWANCES2031 3,4082032 3,2832033 3,1582034 3,0332035 2,9082036 2,7842037 2,6592038 2,5342039 2,4092040 2,2842041 2,1592042 2,0342043 1,9102044 1,7852045 1,6602046 1,5352047 1,4102048 1,2852049 1,1602050 and each year thereafter 1,035

Allowance allocation to Regulated EntitiesAllowance allocation to Regulated Entities35% for electric utility sector;35% for electric utility sector;– Last version gives percentage to rural electric Last version gives percentage to rural electric

cooperatives; fight over allocationcooperatives; fight over allocation 15% for carbon-intensive industries, such as steel and 15% for carbon-intensive industries, such as steel and

cement, in 2014 (reduced by 2% every year) cement, in 2014 (reduced by 2% every year) 9% for local natural gas distribution companies, in 9% for local natural gas distribution companies, in

2016 (reduced to zero between 2026 and 2030) 2016 (reduced to zero between 2026 and 2030) 3% for automakers toward advanced technologies 3% for automakers toward advanced technologies

through 2017 (reduced to 1% from 2018 and 2025) through 2017 (reduced to 1% from 2018 and 2025) 2% for oil refineries from 2014 to 20262% for oil refineries from 2014 to 2026 2% for carbon capture and storage technology from 2% for carbon capture and storage technology from

2014 to 2017 (increases to 5% after 2018)2014 to 2017 (increases to 5% after 2018)

Allowance allocation (cont.)Allowance allocation (cont.)To states and other funds:To states and other funds: 10% for states for renewable energy and efficiency 10% for states for renewable energy and efficiency

investment from 2012 to 2015 (reduced to 5% between investment from 2012 to 2015 (reduced to 5% between 2016 to 2022)2016 to 2022)

5% for tropical deforestation prevention projects 5% for tropical deforestation prevention projects 2% for domestic adaptation to climate change between 2% for domestic adaptation to climate change between

2012 and 2021 (increases to 4% between 2022 to 2026, to 2012 and 2021 (increases to 4% between 2022 to 2026, to 8% in 2027) 8% in 2027)

2% for international adaptation and clean technology 2% for international adaptation and clean technology transfer from 2012 to 2021 (increases to 4% between 2022 transfer from 2012 to 2021 (increases to 4% between 2022 to 2026, to 8% in 2027) to 2026, to 8% in 2027)

1.5% for programs helping home heating oil and propane 1.5% for programs helping home heating oil and propane users (reduced to zero between 2026 and 2030) users (reduced to zero between 2026 and 2030)

1% for Clean Energy Innovation Centers for R&D funding 1% for Clean Energy Innovation Centers for R&D funding 0.5% for job training from 2012 to 2021 (increases to 1% 0.5% for job training from 2012 to 2021 (increases to 1%

after 2022) after 2022)

Modified Formula in passed billModified Formula in passed bill

Emission Allowance Rebate ProgramEmission Allowance Rebate Program For Carbon Intensive Industry declining For Carbon Intensive Industry declining

through 2035through 2035 Read in Conjunction with prior authorized Read in Conjunction with prior authorized

distributionsdistributions

OffsetsOffsets Larger amount available than prior Larger amount available than prior

proposals– usually 2 billion tons of CO2 proposals– usually 2 billion tons of CO2 equivalent per yearequivalent per year

Varies between 15% and 70% of total over Varies between 15% and 70% of total over life of billlife of bill

Split between domestic and foreignSplit between domestic and foreign Foreign subject to 25% penaltyForeign subject to 25% penalty When Passed – set up list of existing When Passed – set up list of existing

offsetsoffsets

Offsets Cont.Offsets Cont. Domestic offset sequestration reversals that Domestic offset sequestration reversals that

are “unintentional” may not be made fully are “unintentional” may not be made fully whole (statute calls for 50% replacement)whole (statute calls for 50% replacement)

Possibility of offset failure could infect the Possibility of offset failure could infect the secondary marketssecondary markets

Complexity and Controversy – Expect to Complexity and Controversy – Expect to see changes with offsetssee changes with offsets

Offsets to USDAOffsets to USDA

Major Change – USDA jurisdiction over all land Major Change – USDA jurisdiction over all land based offsets and sequestration – mostbased offsets and sequestration – most

Also “term” offsetsAlso “term” offsets Positive – USDA has more staffing worked with Positive – USDA has more staffing worked with

farmersfarmers Negatives – role of watchdog? Loopholes?Negatives – role of watchdog? Loopholes? Negative – no environmental review; complication Negative – no environmental review; complication

with pre-emption – Californiawith pre-emption – California EPA oversight role? Senate compromiseEPA oversight role? Senate compromise

Market DetailsMarket Details FERC in charge of initial allocation/auctionFERC in charge of initial allocation/auction Might be transferred to CFTCMight be transferred to CFTC CFTC in charge of regulating “secondary” markets, CFTC in charge of regulating “secondary” markets,

i.e. markets in all financial or other contractual, i.e. markets in all financial or other contractual, risk-hedging instruments containing carbon risk-hedging instruments containing carbon allocations or offsets (regulated like other allocations or offsets (regulated like other commodities)commodities)

Initial offset contracting exempt from thisInitial offset contracting exempt from this Looking at a restriction in all commodity trading Looking at a restriction in all commodity trading

from financial crisis.from financial crisis. All OTC WILL have to be “cleared.”All OTC WILL have to be “cleared.” Safety Valve Safety Valve