On June 26, 2009, the U.S. House of Representatives passed H.R. 2454, the Waxman-Markey American Clean Energy and Security Act of 2009 (ACES), by a vote of 219-212. ACES would create a federal carbon cap-and-trade system, establish a national renewable electricity standard, and incentivize renewable energy and energy efficiency through technology development funds, financing mechanisms, and efficiency standards. This historic bill marks the first time a chamber of the U.S. Congress has passed legislation capping greenhouse gas (GHG) emissions.

ACES has undergone significant revisions from the initial bill submitted to the Energy and Commerce Committee on May 15 and approved by that committee on May 21. A 309-page Manager’s Amendment inserted hours before the final vote represents a negotiated agreement between Representative Henry Waxman (D-California) and key Democratic representatives. With the final bill receiving only eight Republican votes, Waxman needed support from Democrats based in agricultural districts and thus negotiated compromises on key issues such as jurisdiction over carbon offsets and the treatment of corn-based ethanol. Other last-minute changes included authorization for the U.S. Environmental Protection Agency (EPA) to grant rebates for industry sectors with high energy costs, and for the Secretary of Energy to request additional lending authority to assist certain geographic areas with investments in renewable power (up to $3.5 billion per geographic region). The sections below summarize other important provisions of this landmark bill.

Carbon Cap and Trade

ACES would set mandatory limits on GHGs in the U.S. and create a program to allow trading of GHG allowances (the “right” to pollute a certain amount of GHGs). GHG emissions from capped sources would be reduced to 97% of 2005 levels by 2012, 83% by 2020, 58% by 2030, and 17% by 2050. Capped sources include: any electricity source; any stationary source that produces or imports certain fossil fuels that, when combusted, would emit 25,000 or more tons of carbon dioxide equivalent (equal to the emissions from a six megawatt natural gas power plant operating year-round); any geological sequestration site; stationary sources in certain industrial and chemical sectors, including cement, silicon carbide, and petrochemical production; and natural gas distribution companies that deliver at least 460 million cubic feet of natural gas.

From 2012 to 2017, ACES would preempt state “cap-and-trade programs,” defined as regulations that issue a limited number of tradable emission allowances and require the surrender of such allowances for each unit of GHGs emitted. This section of the bill would prohibit the implementation or enforcement of aspects of California’s Global Warming Solutions Act
(AB 32), and likely regional cap-and-trade systems, such as the Regional Greenhouse Gas Initiative (RGGI) and the Western Climate Initiative (WCI), to the extent they are implemented or enforced by states. ACES does not preempt state GHG caps, standards, limits, regulations, or programs that are implemented by other means, such as vehicle-emission or low-carbon fuel standards.

Allowances would be distributed to help electric and gas utilities comply with obligations, benefit low-income consumers, fund energy innovations, and support trade-vulnerable industries. Some allowances would be auctioned to reduce the national deficit. Unlimited banking of allowances is permitted with borrowing allowed for one year, creating a two-year rolling compliance period. Borrowing beyond a year is allowed for up to five years at an 8% per year interest rate.

Carbon Offsets

The use of emissions “offsets” from uncapped sectors to meet GHG caps would be limited to one billion tons of carbon dioxide equivalent annually from domestic sources and one billion tons annually from international sources. Starting in 2017, five metric tons of international offsets must be purchased to emit four metric tons domestically. The EPA Administrator, in consultation with the Secretary of Agriculture, would be responsible for approving offset projects. Proposed offset projects would need to comply with EPA-established methodologies, which would rely on EPA-established baselines for carbon emissions in the calculation of additionality. In general, offsets must be permanent, but ACES allows for term offsets, which are time-limited offsets that result in temporary compliance and a renewed liability after expiration. EPA and the U.S. Department of Agriculture (USDA) will share regulatory authority over the offset market.

House Agriculture Committee Chairman Collin Peterson (D-Minnesota), who amassed almost 40 Democratic votes in the House and gained effective veto power over the bill as it neared passage, negotiated a compromise authorizing the USDA, rather than EPA, to oversee a forestry and agricultural offset program. We expect substantial offsets would be available from the agricultural and forestry sectors. The Manager’s Amendment also modified how lifecycle emissions from biofuels are to be assessed: ACES now requires a broad scientific consensus, based on a National Academy of Sciences report, before EPA can consider the effects of corn-based ethanol on international land-use changes. This change will likely advantage the corn and corn-based ethanol industry for at least a five-year period until the report’s results are available. The amendment also expands the definition of “renewable biomass” to include, among other sources, trees from certain public lands, crop residue, algae, and animal waste.

Renewable Electricity Standard

ACES would create a national renewable electricity standard (RES) that requires utilities to supply an increasing percentage of their load from a combination of energy-efficiency savings and renewable energy (6% in 2012, 9.5% in 2014, 13% in 2016, 16.5% in 2018, and 20% in 2020-2039). Note that large hydropower facilities, new nuclear power, and coal-powered electricity that use carbon capture and storage are excluded from the total energy-supply portfolio upon which the RES is based. Because the RES-required percentage of renewable energy is a fraction of this total, excluding these non-renewable sources reduces the amount of renewable energy required under the RES. Renewable energy credits (RECs) and energy-efficiency credits (also known as “white tags”) can fulfill the RES requirements. Covered electricity suppliers must use RECs for at least 75% of their obligation. They can also use energy-efficiency credits for up to 25% of their obligation. States can petition for an exemption whereby energy efficiency can meet up to 40% of RES obligations. Additionally, ACES does not preempt state Renewable Portfolio Standards (RPSs), and states can operate an RPS that is more stringent than the federal program.

Technology Development

The ACES bill would incentivize technology development by directing emissions allowances to clean energy investments. Examples of areas receiving investment include: state renewable energy and energy-efficiency programs, national energy innovation hubs, advanced technology vehicle manufacturing, wildlife and natural resource adaptation, green job training, and carbon capture and sequestration. In most cases, EPA or the Department of Energy (DOE) would distribute the allowances, which amount to $190 billion in new clean energy technologies, including: $90 billion in new energy-efficiency and renewable energy investments by 2025; $60 billion in carbon capture and sequestration; $20 billion in electric and other advanced technology vehicles; and $20 billion in basic scientific research and development.
ACES would stimulate development of a “smart grid” by: (1) including smart grid capability information on appliance energy-guide labels; (2) requiring the Federal Energy Regulatory Commission (FERC) to support load-serving entities in developing their peak demand reduction goals; (3) including smart grid information in a reauthorized energy-efficiency public-information program; and (4) including smart grid features in a reauthorized energy-efficient and smart-appliance rebate program.

The bill would establish “Clean Energy Innovation Centers” to help companies deploy clean energy alternatives to fossil fuels. ACES would also stimulate carbon capture and storage by establishing a predictable legal regime and requiring national coordination of key legal and regulatory barriers to commercial deployment of the technology. Clean transportation is also a centerpiece of the bill, which has provisions for battery-charging infrastructure and smart grid integration for electric vehicles (EVs) as well as financial assistance for EV technologies.

Green Bank

To develop advanced technologies, ACES would create a Clean Energy Investment Fund and a Clean Energy Deployment Administration (CEDA), also known as the “Green Bank,” to provide for an attractive investment environment through partnership with and support of the private capital market to promote access to affordable financing for accelerated and widespread deployment of clean energy technologies, advanced energy infrastructure, and energy-efficiency technologies. CEDA would issue direct loans using a portfolio-investment approach.

Energy Efficiency

Energy efficiency is a core element of the ACES bill, which strengthens energy conservation and energy-efficiency standards for both new and existing buildings and would enforce new lighting and appliance-efficiency standards. It creates a retrofit policy for residences and a building energy-performance labeling program. It also establishes a rebate program to assist low-income households in energy retrofitting and encourages combined heat and power in industrial facilities. To help translate research into commercial applications, the bill uses emissions allowances to fund “Energy Innovation Hubs,” which are research centers that leverage the expertise and resources of university and private research communities, industry, venture capital, national laboratories, and other participants in energy innovation to support research and development in clean technology areas not being served by the private sector.

The GREEN Act of 2009, included in the version of the bill that passed in the House, would help homeowners build and remodel their homes to save energy and lower costs through energy-efficient and location-efficient mortgages, which require lenders to consider the impacts on a borrower’s credit-worthiness from energy-efficiency savings and reduced transportation costs resulting from a home’s location near work and services.

Implications

The ACES bill faces significant hurdles in the Senate. Although the Democrats now hold 60 seats, senators from farm and coal states may oppose the bill. Gaining support of senators such as Robert Byrd (D-West Virginia) may prove critical to the bill’s passage. In June, the Senate Energy and Natural Resources Committee passed the American Clean Energy Leadership Act of 2009, introduced by Chairman Jeff Bingaman (D-New Mexico), which includes a federal RES but not a carbon cap-and-trade system. We understand that Senate Majority Leader Harry Reid (D-Nevada) wants to see a combined climate and energy bill, and so conflicting and overlapping provisions will need to be reconciled with ACES. According to Senator Barbara Boxer (D-California), the Senate Committee on Environment and Public Works will hold hearings and will mark up the bill beginning July 27, followed by mark-up in a number of other Senate committees. Senator Reid has targeted September 18 as the deadline for Senate committees to conclude their work, with a full Senate vote expected in October.