Over the past few weeks, we’ve written a series of posts here detailing the issues that make up climate policy. The result is a climate policy cheat sheet of sorts: a list of these issues, divided into categories based on our view of their importance. Now that the Kerry-Lieberman draft bill has been released, we can use the list of issues to analyze it. Other summaries of the bill are out there, but we hope this one is simple and accessible enough to be useful to non-experts (this is the same goal we had for the cheat sheet itself). While we clearly have a policy preference—the greatest emissions reduction at the lowest cost—we don’t want to analyze or criticize the bill here; we just want to describe it. Other than the preferences and opinions implicit in our issue categories, we’re just giving you the facts here. We hope that sparks debate (even if it’s unlikely to convince you to tackle reading the 1000-page bill itself).
The Kerry-Lieberman Cheat Sheet
1. Does it create a price on carbon?
In short, yes. Kerry-Lieberman creates a cap-and-trade system that effectively sets a price on carbon emissions — but not all emissions are subject to the price, and those that are may not be included immediately.
2. How much of US emissions are covered by that price?
Initially, in 2013, the bill includes only the electricity and refining sectors within the cap-and-trade system. Transportation is included under the cap as well, but allowances must be bought by producers and importers — they aren’t auctioned. Large industrial facilities are included after 2016. Agricultural emissions aren’t included, but some reductions there can qualify as offsets.
In total, around 80 percent of U.S. greenhouse gas emissions are capped, but different sectors are treated differently. Not all sectors are part of the same market.
3. What is the path of emissions reduction set by the cap?
The emissions cap in the bill would decline over time, and would result in emissions reductions of 4.75 percent by 2013, 17 percent by 2020, 42 percent by 2030, and 83 percent by 2050.
1. How are emissions allowances allocated?
Allowances are allocated by a mixture of gratis allocation and auctions. In the first years of the program, the majority of allocations are given away to industries and various research efforts, while some allowances are auctioned and the revenue generated is used to compensate consumers. By 2030, auctions are used to distribute 75 percent of allowances. A full breakdown of the allowance allocations is available here.
2. How are the public revenues from climate policy spent?
Revenues from auctions will be spent to benefit the public in a number of ways. Kerry-Lieberman directs the majority of auction revenues towards assisting low-income consumers, supporting the Highway Trust Fund, and rebating all consumers, though those provisions do not kick in until later years of the program. In the short term, allowances are given away to local electric and gas utilities with the requirement that the revenues generated be used to reduce the impact of the carbon price on consumers.
3. Are banking and borrowing allowed?
The bill allows for both banking and borrowing. Firms can bank an unlimited amount of allowances. There is also no limit when borrowing allowances from the next calendar year’s allocations. If firms want to borrow from future years, they may do so up to five years ahead, but they can only borrow up to 15 percent of their total allocation for the year in which they are borrowing. Additionally, any borrowed allowances accrue 8 percent interest.
1. Is there a price collar?
Yes. The price floor is set at $12 and increases annually at 3 percent above inflation as measured by the Consumer Price Index. The price ceiling is initially set at $25 and increases annually at 5 percent above inflation.
2. Are offsets allowed?
Offset are allowed. Similar to Waxman-Markey, regulated parties may use up to 2 billion offset credits to be in compliance. At the outset of the program, 75 percent of offset credits must come from domestic sources and up to 25 percent can come from international sources. If regulators determine the supply of domestic offsets is not enough to meet initial proportions, then international offsets may increase up to 50 percent of the total supply. After 2018, 1.25 actual international offset credits are equal to 1 emission allowance. The US Department of Agriculture has primary oversight of domestic offsets.
3. What are the effects on international negotiations and trade-vulnerable industries?
The bill maintains the United States’ previously stated commitment to reduce its emissions by 17 percent of 2005 levels by 2020 and 83 percent by 2050. It includes some funding provisions in the form of allowance allocations for international adaptation efforts. Trade-vulnerable industries’ entry under the cap is delayed until 2016 and they are given rebates in the form of 15 percent of all allowances from 2016 to 2025. The bill also expands current clean energy manufacturing tax credit programs by $5 billion and it establishes a WTO-compatible border adjustment to be instituted sometime after 2020, dependent on presidential and congressional findings.
1. Is a renewable portfolio standard set?
No. There is no federal standard, though states are permitted to keep or implement them.
2. Is existing EPA authority to regulate GHGs preempted?
Generally, yes. The Clean Air Act authority that the EPA currently has to regulate stationary sources is preempted. The EPA would keep its authority to regulate vehicles, the only part of its authority it has used to date for greenhouse gases. The EPA could still set performance standards for industrial sources not included under the cap, but to date the EPA has shown no interest in regulating these smaller sources.
3. Are state GHG regulations preempted?
State cap-and-trade programs would be preempted by the bill, though states with such programs and emitters subject to them would receive credit. Other state-level regulations are not preempted. In principle, states could implement renewable portfolio standards, performance standards, or even a carbon tax.
4. Are allowance markets closed to Wall Street?
The allowance trading market would be regulated by the Commodity Futures Trading Commission, and the regulatory restrictions in the bill are extensive. Markets are, however, open in principle to parties other than emitters themselves if they are “necessary for a liquid and well-functioning market”. Carbon derivatives are allowed but tightly regulated. Short-selling of allowances is prohibited.
5. Does the bill promote energy security?
The bill would increase investment in new nuclear power plants with loan guarantees and an expedited regulatory review process.
The bill would also create incentives to expand offshore oil and gas drilling, with 37.5 percent of royalty revenues directed to states that permit drilling. States would, however, retain veto rights over drilling within 75 miles of their coast and in other circumstances where they can show they would be significantly affected.