Energy/Climate Bill Unveiled in U.S. Senate But Prospects Are Murky

Yesterday, Senators John Kerry (Democrat, Massachusetts) and Joe Lieberman (Independent, Connecticut) released a new climate change and clean energy bill called The American Power Act. This is part of Democrats' efforts to deliver on a key policy objective set out by President Barack Obama. Originally, Senator Lindsay Graham (Republican, South Carolina) was a co-sponsor of the bill, but he withdrew from negotiations in late April. The explosion of the Deepwater Horizon rig in the Gulf of Mexico and the resultant oil spill has complicated the situation for him (a big supporter of offshore drilling) and he also clashed with Democratic leaders over their plans to accelerate immigration reform. The bill is the Senate's equivalent of a version approved by the House of Representatives last June. That was put forward by Representatives Henry Waxman (Democrat, California) and Ed Markey (Democrat, Massachusetts). Drafting the Senate bill has taken eight months of arduous negotiations with lawmakers and interest groups. However, Kerry and his supporters always faced an uphill struggle given the strength of climate change scepticism among Republicans, and general reluctance to do anything that "could harm the economy". The bill's authors contest that the measures would instead boost the economy, allowing the United States to become an international leader in clean energy with hundreds of thousands of connected new jobs, and breaking dependence on foreign oil. Moreover, tackling climate change at this stage could forestall global disaster scenarios with incalculable economic costs.

Key Provisions

• Cap-and-Trade: The Kerry-Lieberman bill would establish a cap-and-trade programme covering the electric power and industrial sectors. This represents about 45% of U.S. greenhouse gas emissions.
• Start Year: The cap-and-trade programme would start in 2013 for the power sector and in 2016 for the industrial sector.
• Reduction Targets: The bill seeks to reduce emissions 17% by 2020 and 80% by 2050. These are the same headline targets as in the House of Representatives' version. It is unclear how this target applies to sectors not covered by the cap-and-trade programme. The exclusion of transportation from the cap-and-trade portion of the bill along with limits on carbon dioxide allowance prices could potentially limit the ability to achieve economy-wide reductions of 17% by 2020.
• Price Controls: The bill sets a floor carbon dioxide allowance price of US$12 per ton in 2013 (escalating at 3% over consumer price inflation (CPI)) and a ceiling carbon dioxide allowance price of US$25 per ton in 2013 (escalating at 5% over CPI).
• Offsets: The United States Department of Agriculture (USDA) rather than the Environmental Protection Agency (EPA) would be in charge of regulating offsets. The bill does not specify a number of offsets that would be allowed.
• Targeted Incentives:
• Carbon capture and storage (CCS): The bill includes US$2 billion per year in funding for CCS research and development. It also provides incentives for the deployment of 72GW of CCS.
• Nuclear: The bill includes US$54 billion in loan guarantees for nuclear power plants, manufacturing tax credits, regulatory risk insurance for 12 projects, accelerated depreciation, and other incentives for nuclear deployment.
• Renewables: The bill is slated to include Jeff Bingaman's (Democrat, New Mexico) renewable energy bill. It calls for renewables to make up 15% of generation by 2020.
• Transportation: Producers and importers of refined products will not participate in the carbon market, but will purchase allowances at a fixed price.
• EPA / State Regulations: The bill would pre-empt EPA from creating further greenhouse gas regulations and would suspend any state greenhouse gas programme.
• Oil Drilling: Expanded drilling off the coasts of mid-Atlantic states would be encouraged. In the wake of the Gulf of Mexico disaster, however, the bill would allow states to opt out of drilling up to 75 miles from their shores. States could also veto drilling plans off their coasts. States that do participate would get 37.5% of oil revenues to protect their coastlines.

Outlook and Implications

The authors of the bill have bent over backwards to broaden its appeal within the Senate. Expansion of offshore oil drilling is a key part of this effort, but this has rather backfired after the explosion of the Deepwater Horizon rig in the Gulf of Mexico. That has hardened opposition to drilling from more left-leaning members of Congress and is likely to prolong deliberations on all sides. The expansion of nuclear power is also controversial in some quarters, but there is much broader acceptance these days that this will have to play an important part in the energy mix for the foreseeable future. The withdrawal of Republican Lindsay Graham as a sponsor is a heavy blow. The Democrats would need at least one Republican vote in the Senate to overcome a filibuster and see the legislation through. So far, no Republicans have come forward to support the Kerry-Lieberman draft. Even if the Senate does approve the legislation it still has to be reconciled with the House version, and there are some significant differences between the drafts. All of this has to be seen in the context of the looming mid-term legislative elections in November, which will harden lawmakers' positions, distract their attention, and are likely to result in a significant swing to the Republicans. Democrats have shown that they can triumph against the congressional odds before—witness the healthcare reforms—but repeating this feat for climate change is a huge challenge. The machinations will be watched closely around the world because strong U.S. leadership on climate change is arguably required to get China and other major polluters to act vigorously. Obama has sought to build international momentum, but he needs concrete commitments from Congress to have a real impact. Yesterday he gave his endorsement to the Kerry-Lieberman bill, saying: "Americans know what's at stake by continuing our dependence on fossil fuels. But the challenges we face — underscored by the immense tragedy in the Gulf of Mexico — are reason to redouble our efforts to reform our nation's energy policies. For too long, Washington has kicked this challenge to the next generation. This time, the status quo is no longer acceptable to Americans." He called for the Senate to approve the legislation this year, but completion of the legislative process looks increasingly unlikely before the mid-term elections.

With contributions from IHS CERA