Kerry and Lieberman Present Much-Anticipated Climate Bill

January 1, 0001


On May 12, 2010, Senators Kerry and Lieberman issued their new greenhouse gas (“GHG”) bill, entitled the American Power Act (“APA”). The 987-page bill is styled as a "Discussion Draft" and has not been formally introduced in the Senate, suggesting that significant modifications are anticipated. Similar to the bill introduced by Congressmen Waxman and Markey (H.R. 2454) and passed by the House last year, the APA takes a “cap and trade” approach to regulating greenhouse gases, and sets a goal of reducing GHG emissions by 17% below 2005 levels by 2020 (the same target set in H.R. 2454 and pledged by President Obama prior to the 2009 Copenhagen summit) and 80% by 2050. The bill also would preempt the Environmental Protection Agency’s regulation of stationary sources of GHG emissions, and includes an array of provisions designed to encourage development of nuclear and renewable energy and increase energy efficiency. It also responds to the Deepwater Horizon spill by giving states the option to prohibit oil leases within 75 miles of their coasts and by providing for revenue sharing with states in order to fund coastal-protection programs.

Cap and Trade Provisions

Covered Entities. The bill sets an annual total emissions cap and requires that “covered entities” annually retire allowances equal to the CO2 equivalent of their emissions (or in the case of fuel providers, the emissions associated with their fuels). Emissions would be capped beginning in 2013, but only for the electric power sector and providers of transportation fuels and other refined oil products. Industrial sources and natural gas distributors would not be subject to caps until 2016.

The industrial sources covered by the bill are similar to those covered under H.R. 2454, and include manufacturers in the following sectors: primary aluminum, ammonia, cement, titanium dioxide, and petroleum refining. In addition, the following industrial sectors are covered if they emit more than 25,000 tpy of CO2 equivalent: chemicals, ethanol, food processing, glass, iron and steel, titanium dioxide, and pulp and paper.

Allowance Distribution. In the first twelve years of the program, many covered entities, including electric utilities, oil refiners, and certain manufacturers, would receive free allowances to buffer impacts on consumers and trade-vulnerable industries (and garner support for the bill). Allowances would also be distributed to various public entities, which could then sell them to fund energy efficiency and adaptation programs. Allowances not issued for free could be purchased in government auctions or in regulated markets. Notably, fuel providers would be required to purchase allowances directly from the government at fixed prices that are set quarterly based on auction prices. After 2025, allowances would be increasingly auctioned off, with the proceeds redistributed to taxpayers through a personal income tax credit.

Offsets. Similar to H.R. 2454, the APA would allow the use of up to 2 billion tons of GHG offsets annually. Offsets are credits generated through emissions reduction projects. The bill allows up to 25% of those offsets to be sourced internationally (H.R. 2454 has a 50% limit). This compares to a total cap of 5.5 billion tons in 2016. The extent to which offsets will be used to meet obligations will depend upon a number of factors, including the price of allowances and the availability of viable offset projects.

Carbon Market Regulation. In order to address concerns regarding carbon market manipulation, the APA limits participation in the allowance market to those with compliance obligations and registered market participants. Allowance and offset trading would occur solely on exchanges and be cleared through registered clearing organizations. Swaps and short selling would be limited. In contrast to H.R. 2454, the APA also would permanently preempt state GHG emissions trading authority, resulting in a single federal GHG trading scheme.

Energy Provisions

Nuclear Power. In order to encourage domestic nuclear power generation, the bill would require the Nuclear Regulatory Commission to establish and implement expedited procedures for issuing combined construction and operating licenses for qualified new nuclear reactors. In addition, the bill would remove the requirement of an administrative hearing for non-contested issues prior to the granting of permits and licenses. It would also increase funding opportunities and tax incentives for nuclear technology by:

(1) increasing funding for the Innovative Technology Loan Guarantee Program to US$54 billion and establishing a loan guarantee retention fee to ensure that the money is returned to the program expeditiously;

(2) reducing the accelerated depreciation period for new nuclear power plants to five years;

(3) providing a 10% tax credit for the construction of nuclear power facilities;

(4) expanding the qualified advanced energy project tax credit to include nuclear power facilities;

(5) modifying the tax credit for production from advanced nuclear power facilities so that it can be applied with respect to facilities that are owned by a public-private partnership or co-owned by a qualified public entity and a non-public entity;

(6) allowing tax-exempt bonds to be used for public-private partnerships for advanced nuclear power facilities; and

(7) providing grants equal to 10% of the qualified expenditures to be used in lieu of tax credits for qualified nuclear power facilities.

Renewable Energy and Energy Efficiency. The APA would allocate emissions allowances to states and Indian tribes to carry out renewable energy and energy efficiency programs, including those related to improved building codes; energy-efficient manufactured homes; building energy performance labeling; low-income community energy efficiency improvements; energy efficiency retrofits of existing buildings; renewable energy generation generally; renewable energy development in urban areas; cost-effective energy efficiency programs for end-use consumers; and the development of a Smart Grid, including integration of renewable energy resources and distributed generation, demand response, demand-side management, and systems analysis.

The bill does not call for a national renewable electricity standard and instead declares that it is the policy of the United States to support the continued growth of voluntary renewable energy markets.

Clean Transportation. The APA calls for the development of a national transportation low-emission energy plan focused on both the near-term and long-term need for electric drive vehicle refueling infrastructure and where that infrastructure should be located. Building upon the plan, pilot projects would be established in different regions of the country to demonstrate both electric drive vehicles and infrastructure, with at least one project focused in a rural region and with at least one project focused on freight issues.

The bill would also provide several significant tax credits related to natural gas vehicles. It would extend and double for 10 years the alternative fuel credits that are available for the purchase of natural gas vehicles that weigh more than 8,500 pounds and operate on compressed or liquefied natural gas or can operate for more than 175 miles on one fueling of compressed or liquefied natural gas and otherwise operate on gasoline or diesel. It would also extend and double the credit for vehicles that weigh less than 8,500 pounds but are acquired by a taxpayer who owns and operates at least ten motor vehicles and has placed into service more than two natural gas vehicles.

Clean Energy and Low-Carbon Research and Development. The APA would competitively distribute allowances to institutions of higher education, companies, research foundations, trade and industry research collaborations, and consortia of such entities, to promote the development and deployment of clean energy technology. It would also establish a federally funded research and development center called the “National Industrial Innovation Institute” to support development and demonstration of technology that improves the efficiency and competitiveness and reduces the energy consumption and greenhouse gas emissions of domestic manufacturers.