Current Federal Action on Climate

1. Current Federal Action on Climate Patrick Hogan Regional Policy Coordinator Pew Center on Global Climate Change NCEL Forum Memphis, TN June 11, 2010

2. Kerry-Lieberman Overview • Result of several months of bipartisan negotiations • Intended to be released April 26 as Kerry-Graham-Lieberman, though delayed after immigration controversy • Eventually released on May 12 as Kerry-Lieberman • Undergoing six-week EPA economic analysis, [released this week]

3. Overview • Targets: 17% below 2005 levels by 2020; 83% below by 2050 • Coverage: 85% of U.S. GHG emissions under the cap • Threshold: Covers entities emitting >= 25K tons CO2e; EPA may lower reporting threshold to 10K • Offsets: 2 billion tons domestic & int’l • Cost containment: Strategic reserve of 4 billion allowances available if allowance prices rise above trigger price • Clean Air Act limitation: GHGs not regulated as criteria, hazardous, or international air pollutants under CAA • State role: GHG cap-and-trade pre-empted; other state programs unaffected • Allowance distribution: Multiple categories • Bipartisan Senate Energy Committee ACELA bill may be incorporated in the future

4. Emissions Cap • Reduction targets • 95.25% of 2005 levels by 2013 • (slightly more aggressive than Waxman-Markey) • 83% of 2005 levels by 2020 • 58% of 2005 levels by 2030 • 17% of 2005 levels by 2050 • Mandatory reporting by 2011 for large sources emitting >25k tons/year; EPA may lower • EPA’s discretion as to whether vehicle fleets with >25k tons/year must report

5. GHG Compliance Program • Compliance begins in 2013 for: • Utilities • Refineries (onsite emissions) • Refined product providers (transportation fuel) • Compliance begins in 2016 for: • Industrial sources • Natural gas local distribution companies • Allowances surrendered on an annual basis for all sources except for transport fuels (done on a quarterly basis) • One-year compliance period with unlimited next year borrowing (similar in effect to two-year compliance period)

6. Transportation GHG Coverage • 93% of GHG emissions from transportation are covered • Transportation is covered under cap, but does not participate in the auction and may not trade, sell, bank or borrow allowances • EPA would set aside allowances from auctions by estimating the total need of the transport sector.  Refined product providers don’t compete with other sectors. • EPA can also borrow from one year ahead on a limited basis if needed.  • Refined product providers must pay the EPA quarterly for allowances • The amount is equal to the most recent allowance auction clearing price for the other sectors X the attributable GHG emissions of the covered refined product during the previous quarter • The allowance price is announced at least 30 days before the beginning of the compliance quarter so that refined product providers can adjust future product prices accordingly

7. Transportation GHG Coverage (cont’d) • EPA will set the percentage of allowances from the general auction pool that can be set aside for transportation. If EPA estimates of allowances for the transportation sector are too low, EPA can borrow from the following year’s pool of allowances. If EPA overestimates, then those allowances are returned to the auction pool for the following quarter’s auction. • It is unclear what happens if transportation needs more allowances than what is available in the auction pool throughout the life of the program

8. Allowance Markets for other Sectors • Unlimited banking • Unlimited one-year borrowing w no interest • Borrowing up to 15% of compliance obligation with vintage years 1-5 beyond calendar year at 8% interest per year • Trading restricted to compliance entities and regulated carbon market participants • Restrictions to prevent excessive speculation • All allowances bought and sold on an exchange

9. Allowance Allocation

10. EITE Provisions • Allowance rebates for EITE ~ W-M • Cover direct, indirect compliance costs based on same allocation formula as W-M • Phase out starting in 2026, gone by 2030 • Require surrender of allowances for imports in specified sectors, unless President determines otherwise

11. Credit for Early Action • 1% of allowance value from 2013-2015 goes for early action • 2/3 of this amount goes to states with cap and trade programs • 1/3 of this amount goes to early action offset credits

12. Cost Containment • Up to 2 billion tons of offsets system wide can be used for compliance (25% of which can come from international sources) • International limit may be increased up to 1 billion tons if the Administrator determines domestic supply is insufficient, but 2 billion ton overall limit still applies • President may recommend to Congress to increase or decrease total number of offsets • Domestic offset program similar to Stabenow bill

13. Cost Containment • Price collar with a floor at $12/ton and a ceiling of $25/ton escalating respectively at 3% and 5% above inflation annually • Strategic reserve contains 4 billion tons allowances over the life of the program pulled from future program years • Allowances are sold at the ceiling rate of that year • Covered entities can purchase reserve allowances up to 90 days before the date of compliance for up to 15% of their compliance obligation in that year • Must use strategic allowances within one year • Revenue from Strategic Reserve auction to be used to purchase REDD offsets which will be used to replenish the Reserve

14. Nuclear Provisions • Increases nuclear loan guarantee funding to $54 billion (from $18.5 billion) • Expands standby support regulatory risk insurance to cover up to 12 reactors (rather than 6) • Includes provisions to expedite nuclear licensing • Expands tax credits for nuclear power investments and generation

15. Offshore Oil and Gas • Provides states with 37.5 percent of government revenue from drilling in offshore areas previously subject to drilling moratoria • Allows states to prohibit offshore drilling within 75 miles of their coasts • Subject to Department of Interior impact analysis, any states directly impacted by potential oil spills in newly opened offshore areas eligible for revenue sharing can prevent leasing from proceeding

16. Coal Provisions • Federal agencies to develop national CCS deployment strategy • CCS trust fund to finance first 10 GW of commercial-scale demonstration projects • Legal framework for regulating geologic sequestration sites • Authorizes bonus allowances in two phases • Performance standards for new coal-fueled power plants. New facilities initially permitted after January 1, 2020 subject to a performance standard of a 65% reduction in CO2 emissions. Plants permitted between 2009 and 2019 are subject to an annual CO2 emission reduction of 50% • Provides accelerated depreciation and investment tax credits for early replacement or retrofit of existing coal plants not subject to the CO2 performance standard

17. Transportation Funding • Most funds go to Highway Trust Fund and TIGER grant program;may or may not reduce GHG emissions • Transportation Planning Program (up to $1.875 billion) • Clean Vehicle Technology Fund (fixed % of allowances) • Natural Gas Vehicle Support (separate funding mechanism)

18. State Highlights • Pre-empts state cap and trade programs; does not pre-empt other state actions • Provides for exchange of state for federal allowances • Less allowance value to states than under W-M for efficiency, renewables, etc • States receive allowance value for consumer protection for home heating oil • Offshore drilling: revenue sharing and veto power

19. State Highlights (cont’d) • Directs Administrator to consult with regional cap and trade initiatives in developing regulations for implementation • Early action allowances available for states who have enacted cap and trade programs • No money for state adaptation programs

20. Meanwhile, down the street at EPA… • Mass. v. EPA: EPA required to determine whether GHGs from new motor vehicles endanger public health or welfare • Endangerment Finding: In Dec. 2009, EPA determined that GHGs endanger public health and welfare. EPA then required to regulate GHG emissions from motor vehicles under CAA • Motor Vehicle Regulations: In May 2009, President Obama, with the support of EPA, DOT, California, environmental organizations, and the auto industry, announced harmonized Corporate Average Fuel Efficiency (CAFE) standards and GHG emissions standards for motor vehicles at the Federal level, with California agreeing to adopt the Fed standards from 2012-2016 (35.5 mpg in 2016)

21. Meanwhile, down the street… • Stationary Sources: Once a pollutant is regulated under the CAA (e.g., motor vehicle regulations) major new sources or modifications are subject to the Prevention of Significant Deterioration (PSD) program and to Title V operating permits. • PSD program requires major new or modified stationary sources (such as power plants and manufacturing facilities) to implement “best available control technologies” for pollution abatement. • PSD and Title V operating permits are required for all sources that emit a regulated pollutant above 100 or 250 tons/year, depending on the source. Because this threshold, if applied to GHGs, would greatly increase the number of facilities requiring PSD review or Title V permitting. Based on administrative necessity, EPA’s new Tailoring Rule substantially increases these thresholds for the initial years of the program.

22. Looking ahead… • Final Rule: EPA issued final tailoring rule in May 2010 • Starting January 2011, new or modified sources already subject to NSR requirements for other pollutants must meet these requirements for GHGs if they increase emissions by >75,000 tons /CO2e/year. • On July 1, 2011, requirements will apply to new or major modified sources that emit at least 100,000 tons/CO2e/year and to facilities emitting 75,000 tons/CO2e/year, even if they do not meet the NSR requirements for other pollutants. • In July 2012, the requirements will begin applying Title V operating permit requirements to existing sources that emit 100,000 tons of CO2e annually. No sources emitting <50,000 tons of CO2e /year will be subject to permitting requirements until at least April 30, 2016. • Implementation challenges for states? • Timing, applicability, state role, defining BACT for GHGs, pushing innovation, energy efficiency…

23. Looking ahead… Prospect of EPA regs is one reason to consider legislation, but… • Rockefeller Proposal: In March 2010, Senator Rockefeller introduced legislation would codify a 2-year delay in EPA regulation of GHGs (would not delay motor vehicle rule). • Murkowski Proposal: In January 2010, Senator Murkowski introduced a joint resolution to override the Endangerment Finding, under the Congressional Review Act of 1996. • If passed and signed into law, the Joint Resolution would overturn EPA’s endangerment finding and prevent the Agency from taking any action to regulate GHGs (including the motor vehicle rule) without additional legislation. • [Senate vote held on June 10th…?]

24. What happens next? • Still reading, digesting, analyzing K-L • Senate Majority Leader Reid decides how to proceed; [caucus meeting on June 10th…] • Conditions for legislative success • Administration engagement • Senate Republican engagement • [Murkowski vote? • Would prevent all EPA regulatory actions until authorized by new legislation.]

25. For More Information www.pewclimate.org

26. Allowance Allocation

27. Allowance Allocation for Transportation