Download Section 733(b) (page 185) - American Public Power Association

American Public Power Association
May 2009
Title III of H.R. 2454, American Clean Energy and Security Act,
Waxman-Markey Amendment of May 18:
Summary of Major Provisions Related to the Electricity Sector
Title III of H.R 2454, as amended May 18, 2009, adds Title VII, Global Warming Pollution
Reduction Program, and Title VIII, Additional Greenhouse Gas Standards to the Clean Air Act
(CAA). Section numbers in the 700s are in new Title VII, and section numbers in the 800s are in
new Title VIII.
Reduction Goals
Sec. 702 (page 378) and Sec. 703 (page 379)
The economy-wide greenhouse gas (GHG) emission reduction goals are: 97% of the 2005 level
by 2012; 80% of the 2005 level by 2020; 58% of the 2005 level by 2030; and 17% of the 2005
level by 2050. The GHG reduction goals for the specified sources (Sec. 703) are the same as
economy-wide goals for 2012, 2030, and 2050. The 2020 goal for specified sources is 83% of
the 2005 level, which is slightly higher than the economy-wide goal.
Coverage of Electricity Sector
Sec. 722(b)(1) (page 429)
Fossil fuel-fired generating units must submit allowances for all CO2 emissions, except
emissions from petroleum-based or coal-based liquid fuels, natural gas liquid, renewable
biomass, or petroleum coke. (Petroleum and coal-based liquids are covered at the upstream
source.) Thus, both coal-fired and natural gas-fired units must submit allowances.
Sec. 700(13), definition of covered entity (p. 535)
In this definitions section, the bill establishes size exclusions for several types of covered
entities; generally the exclusion is for sources that emit 25,000 tons of carbon dioxide
equivalent or less in a year. However, the exclusion does not apply to electricity sources.
Allowance Cap
Sec. 721(e) (p. 420)
The graph below compares the H.R. 2454 allowance cap with several 2008 bills: DingellBoucher, Lieberman-Warner, and Markey. In all cases, compliance begins in 2012, and both
H.R 2454 and Dingell-Boucher delay the compliance date for certain industrial sources and for
natural gas local distribution companies. After this phase-in period, the H.R. 2454 cap is very
similar to the cap in the 2008 Markey bill. In contrast, Dingell-Boucher provides more
allowances in the early years.
American Public Power Association
May 2009
Cap and Trade Allowances
7,000
6,500
Industrial Sources
Added
NG LDCs Added
6,000
Dingell-Boucher
5,500
5,000
(in millions)
4,500
Lieberman-Warner
4,000
3,500
3,000
Markey (2008)
2,500
HR 2454 (WaxmanMarkey)
2,000
1,500
1,000
500
2050
2048
2046
2044
2042
2040
2038
2036
2034
2032
2030
2028
2026
2024
2022
2020
2018
2016
2014
2012
0
1 allowance = 1 metric ton of CO2 equivalent.
The following graph compares the allowance cap in the March 2009 draft of the Waxman-Markey bill
with HB 2454, as amended on May 18, 2009. The HB 2454 cap is slightly higher prior to 2030.
Allowance Cap for Waxman-Markey Bills
7,000
6,500
Industrial Sources
Added
6,000
NG LDCs Added
5,500
HR 2454
5,000
(in millions)
4,500
Waxman-Markey
March Draft
4,000
3,500
3,000
2,500
2,000
1,500
1,000
500
1 allowance = 1 metric ton of CO2 equivalent.
2
2050
2048
2046
2044
2042
2040
2038
2036
2034
2032
2030
2028
2026
2024
2022
2020
2018
2016
2014
2012
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May 2009
Section 721(e) also provides that if emissions from covered entities do not represent specified
percentages of 2005 emissions in 2012, 2014 or 2016, the allowance caps shall be adjusted to be
consistent with the reduction targets established in Sec. 703 are met.
Sec. 721(f) (p. 425)
Compensatory allowances will be distributed for fuels covered at upstream sources (petroleumbased fuels, for example) if the fuel is not used in combustion (as a feedstock, for example).
Compensatory allowances may also be distributed for the destruction of fluorinated gases.
Disposition of Allowances
Sec. 781 (p. 551) and Sec. 782 (p. 553)
These sections allocate allowances to various sectors and for various purposes. The following
chart shows allocations for the first few years of the program. Allocations to the electricity
sector, natural gas LDCs, and consumers of home heating oil end in 2029. Allocations for
investment in clean vehicle technology and for domestic fuel production end in 2025 and 2026.
Note that per Section 726 (Strategic Reserves), allowances to the strategic reserve are subtracted
from the allowance caps established in Section 721. All other allocation percents set forth in the
bill apply to this reduced cap level.
Allocation Percents for First Six Years of Program
2012
Percent of allowances established under Sec. 721:
Sec. 781: In accordance with Part E: Supplemental
Reductions for Reduced Deforestation
5.00%
Sec. 782:
Electricity Sector
Natural Gas LDCs
Consumers of Home Heating Oil
Low and Moderate Income Households
Trade-Vulnerable Industries
Carbon Capture and Sequestration Technology
Renewable Energy and Energy Efficiency (distributed per
Sec.132 of this Act: State programs)
Renewable Energy and Energy Efficiency (distributed per
Sec.201 of this Act: Building Codes)
Clean Energy Innovation Centers (R&D)
Investment in Clean Vehicle Technology
Domestic Fuel Production - to Refiners
Investment in Workers
Domestic Adaptation
Climate Change Health Protection and Promotion Fund
Wildlife and Natural Resource Adaptation
International Adaptation
International Clean Technology Deployment
Future Year Allowances
2013
5.00%
2014
5.00%
2015
5.00%
2016
5.00%
2017
5.00%
2018
5.00%
43.75% 43.75% 38.89% 38.89% 35.00% 35.00% 35.00%
9.00% 9.00% 9.00%
1.875% 1.875% 1.67% 1.67% 1.50% 1.50% 1.50%
15.00% 15.00% 15.00% 15.00% 15.00% 15.00% 15.00%
2.00% 2.00% 15.00% Declines annually from 15%.
2.00% 2.00% 2.00% 2.00% 5.00%
9.50% 9.50% 9.50% 9.50% 6.50% 6.50% 5.50%
0.50%
1.50%
3.00%
0.50%
1.50%
3.00%
0.50% 0.50% 0.50% 0.50% 0.50%
1.50% 1.50% 1.50% 1.50% 1.50%
3.00% 3.00% 3.00% 3.00% 1.00%
2.00% 2.00% 2.00% 2.00% 2.00%
0.50% 0.50% 0.50% 0.50% 0.50% 0.50% 0.50%
0.90% 0.90% 0.90% 0.90% 0.90% 0.90% 0.90%
0.10% 0.10% 0.10% 0.10% 0.10% 0.10% 0.10%
1.00% 1.00% 1.00% 1.00% 1.00% 1.00% 1.00%
1.00% 1.00% 1.00% 1.00% 1.00% 1.00% 1.00%
1.00% 1.00% 1.00% 1.00% 1.00% 1.00% 1.00%
In 2014-2030, a string of future year allowances are auctioned.
For 2012-2025, any undesignated allowances shall be
auctioned and proceeds deposited in Treasury.
For 2026-2050, any undesignated allowances are auctioned &
proceeds put in Climate Change Consumer Refund Account.
Deficit Reduction
Climate Change Consumer Refund
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Climate Change Rebates
Sec. 789 (p. 602) and Sec. 782(r) (p. 565)
By October 31 of each calendar year, the President (or his designee) shall distribute the funds in
the Consumer Climate Change Rebate Fund on a per capita basis to each household in the U.S.
The Fund receives money beginning in 2021 from the future years’ allowance auctions and
beginning in 2026 from the auction of any allowances remaining after all allocations. For all
years, any allocated allowances that are not distributed by March 31 of the following year will
be auctioned and the proceeds allocated to the fund. (Note that Section 782(r) refers to this fund
as the Climate Change Consumer Refund Account.)
Electric Sector Allowance Allocations
Sec. 783 (pp. 566-587)
The electric sector receives 35% of total allowances for 2016 through 2025, and the sector’s
allowances are phased out (declining by seven percentage points each year) by 2030. (The
allocation percents are higher in 2012-2015 because the total cap is lower, as the industrial and
natural gas LDC sector are not subject to the cap until 2014 and 2016, respectively.)
Electric sector allowances go to three groups: long-term contract generators, merchant coal
generators, and local distribution companies (LDCs). A long-term contract generator includes
certain qualifying small power production facilities, cogeneration facilities, and new
independent power production facilities that have power sales agreements executed before 2007
that do not allow for the recovery of CO2 emission compliance costs. These generators receive
allowances to cover their emissions until their contract expires, is terminated, or is amended.
Merchant coal generators are generation facilities that derive at least 85% of heat input from
coal or petroleum coke and are not subject to retail rate regulation. Facilities owned by a
federal, state, regional agency, or power authority are specifically excluded from the merchant
coal generator definition. These generators receive allowances equal to 50% of qualifying
emissions, adjusted downward based on the overall decline in the total emissions cap each year.
(Qualifying emissions equal the unit’s megawatt-hours generated in the current year multiplied
by the unit’s historical CO2 emissions rate.) However, the allocations to merchant coal
generators are capped at 10% of the amount allocated to the electricity sector. The Federal
Energy Regulatory Commission (FERC) is required to complete a study by July 1, 2014 to
determine whether the merchant coal generator allocation is likely to result in windfall profits.
An LDC is an electric utility (1) that has a legal, regulatory, or contractual obligation to deliver
electricity directly to retail customers, regardless of what entity sells the electricity as a
commodity to the retail customer; and (2) whose rates (except in the case of a registered
cooperative) are regulated by a state regulatory authority, regulatory commission, municipality,
public utility, or by an Indian tribe. LDCs receive all allowances remaining after the allocations
to merchant coal and long-term contract generators.
LDCs receive 50% of these allowances based on their annual average CO2 emissions
attributable to generation of electricity sold at retail by the LDC. For 2012 and 2013, the
average is based on the 2006-2008 time period, or any other 3 consecutive years between 1999
and 2008. For 2014 and subsequent years, the LDC may also choose to use the average for any
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May 2009
3 consecutive years between 2009 and 2012. For an LDC that has new units that were not fully
operational prior to 2012, the LDC may choose to use only the 2012 period.
The EPA Administrator will determine average CO2 emissions attributable to each LDC’s retail
sales and will use the best available data, including regional fuel mix information. Different
methodologies may be applied in different regions if appropriate to obtain the most accurate
estimate.
The other 50% of LDC allowances are allocated based on average retail electricity deliveries for
2006-2008, or any other 3 consecutive years between 1999 and 2008. Every three years, the
allocation percents based on retail sales will be updated to reflect increases in the number of
customers in an LDC’s service territory.
LDC allowances must be used exclusively for the benefit of retail ratepayers. The benefits must
be distributed among ratepayer classes, and no LDC may use allowances to provide any
ratepayer a rebate that is based solely on the quantity of electricity delivered to the customer.
There are extensive regulatory and reporting requirements to ensure the proper use of the
allowances. (See pages 576-580 of the bill.)
The following table shows an estimate of allowances available to LDCs. As noted above, the
merchant coal generators allocation is capped at 10% of the total to the electricity sector. There
is no way to assess the number of allowances that will be allocated to long-term contract
generators, but the amount is likely to be small. The estimate in the table assumes that taken
together, allocations to merchant coal and long-term contract generators are 5% of total
allowances. (Five percent is the amount named in the May 14, 2009 “Proposed Allowance
Allocation” statement issued by Rep. Waxman and Rep. Markey.)
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May 2009
Waxman-Markey Amendment to HR 2454, released May 18, 2009
Allowances are in millions; each allowance = one metric ton of CO2 emissions
Estimate: Merchant coal & long-term contract generators receive 5% of total cap (beginning in 2016).
Each year, merchant coal generators can receive no more than 10% of electric sector allocation.
Total Cap
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022
2023
2024
2025
2026
2027
2028
2029
2030
Strategic
Reserve %
4,627
4,544
5,099
5,003
5,482
5,375
5,269
5,162
5,056
4,903
4,751
4,599
4,446
4,294
4,142
3,990
3,837
3,685
3,533
1.00%
1.00%
1.00%
1.00%
1.00%
1.00%
1.00%
1.00%
2.00%
2.00%
2.00%
2.00%
2.00%
2.00%
2.00%
2.00%
2.00%
2.00%
2.00%
Cap Minus
Strategic To Electric Sector
Reserve Percent
Total
4,581
4,499
5,048
4,953
5,427
5,321
5,216
5,110
4,955
4,805
4,656
4,507
4,357
4,208
4,059
3,910
3,760
3,611
3,462
43.75%
43.75%
38.89%
38.89%
35.00%
35.00%
35.00%
35.00%
35.00%
35.00%
35.00%
35.00%
35.00%
35.00%
28.00%
21.00%
14.00%
7.00%
0.00%
2,004
1,968
1,963
1,926
1,900
1,862
1,826
1,789
1,734
1,682
1,630
1,577
1,525
1,473
1,137
821
526
253
0
To Generators:
Merchant
Long-Term
Coal
Contract
(10% of Electric)
200
197
196
193
190
186
183
179
173
168
163
158
152
147
114
82
53
25
0
Remaining
for LDCs
86
85
84
83
82
80
79
77
75
72
70
68
66
63
49
35
23
11
0
Auctions Procedures
Sec. 791 (p. 604)
The EPA Administrator will establish regulations for auctioning allowances. Auctions will be
held four times a year, beginning March 31, 2011, at the latest. At each auction, allowances for
the current year (beginning in 2012) and a portion of allowances covering periods up to four
years in the future will be offered. Auctions will be conducted under a single-round, sealed-bid,
uniform-price format. Any person that meets financial assurance requirements may participate
in auctions, and no entity can purchase more than 5% of allowances offered for sale at any
quarterly auction. There is a minimum reserve auction price of $10 for auctions occurring in
2012, and the minimum will increase each year by 5% plus the rate of inflation as measure by
the Consumer Price Index for all urban consumers.
Transparency: Each bidder must disclose any entity or person who is sponsoring or benefiting
from the bidder’s participation. After the auction, the Administrator will publish the identities of
winning bidders, the quantity of allowances obtained by each bidder, and the clearing price.
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1,717
1,687
1,682
1,651
1,628
1,596
1,565
1,533
1,486
1,441
1,397
1,352
1,307
1,262
974
704
451
217
0
American Public Power Association
May 2009
Sec. 792 (p. 607)
An entity that holds allowances may request the EPA Administrator to auction the allowances
on consignment.
Offsets and International Allowances
Sec. 722(d) (p. 435)
Covered entities can comply with the requirement to submit emissions allowances issued under
this program using alternative methods.
Covered entities, collectively, can use offset credits to comply with up to 2 billion tons of GHG
emissions each year. Individually, a covered entity can satisfy up to a certain percentage of its
requirement using offset credits. The percentage is computed by dividing 2 billion by the sum of
2 billion plus the prior year’s cap. This calculation equals 27% to 31% of the compliance
obligation through about 2025, with the percentage increasing each subsequent year and
reaching over 60% by 2050.
No more than half of the total percentage allowed in each year can be met by domestic offsets
and no more than half can be met by international offsets. If the EPA Administrator determines
that domestic offsets are likely to offset let than 0.9 billion metric tons of GHG in a given year,
the Administrator may increase the percent of emissions that can be offset through international
offsets.
A covered entity must turn in one domestic offset credit or one international offset credit for
each required emission allowance. Beginning in 2018, a covered entity must turn in 1.25
international offset credits for each required emission allowance.
In any year, a covered entity can submit international allowances or compensatory allowances
to satisfy its compliance requirements.
Penalty for Non-Compliance
Sec. 723 (p. 441)
A covered entity that does not hold sufficient allowances on the compliance date must: (1) pay
a penalty equal to the number of additional allowances needed to comply multiplied by twice
the market value of emissions; and (2) submit in the following year the amount of allowances
needed to make up for the shortfall.
Banking and Borrowing
Sec. 725 (p. 445)
An allowance can be used to meet the compliance obligation requirements for emissions in the
vintage year or any subsequent year. In addition, an allowance may be used to meet compliance
obligations for emissions in the calendar year immediately preceding the vintage year for the
allowance. No interest is charged.
A covered entity can satisfy up to 15% of its obligation by borrowing allowances from a vintage
1 to 5 years later. These must be paid back with “interest” at the time that allowances are
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borrowed – interest is retirement of a number of allowances equal to 0.08 times the number of
years until the vintage year.
Strategic Reserve
Sec. 726 (p. 448)
Strategic reserve allowances shall be auctioned each quarter, and only covered entities can
participate in the auction. An entity can purchase up to 20% of its annual obligation, but no
entity can purchase more than 20% of the allowances offered for sale.
A percentage of each year’s allowances will be assigned to the strategic reserve: 1% of the
2012-2019 allowances; 2% of the 2020-2029 allowances; and 3% of the 2030-2050 allowances.
These allowances are allocated from the total pool of allowances established in Sec. 721 before
any other allocations. All other allocation percents established in the bill are percents of the Sec.
721 allowances minus the amount allocated to the strategic reserve. In addition, any allowances
that offered for sale in a regular auction (under Sec. 791) but were not sold will be transferred to
the strategic reserve.
The allowances offered for sale each year are limited to 5% of the total emissions budget in
2012-2016 and 10% in 2017 and subsequent years. They will be sold at a single-round, sealedbid, uniform-price auction at a minimum price, and any unsold amounts will be returned to the
reserve. (There is no provision for allowances that are assigned to the strategic reserve but never
purchased in a strategic reserve auction.) The minimum strategic reserve auction price in 2012
is $28 (in constant 2009 dollars), and this is increased by 5%, plus the inflation rate, in 2013 and
2014; the price is 60% above a rolling 36-month average market price in 2015 and subsequent
years.
Proceeds from strategic reserve auctions shall be deposited in the Strategic Reserve Fund, and
the fund will be used to purchase international offset credits for reduced deforestation; these
credits shall be retired and 80% of the amount converted to emissions allowances. These
allowances may be used to fill the strategic reserve to its original size; allowances in excess of
this amount may be assigned a vintage year and treated as part of the deficit reduction or climate
change consumer refund pools (in accordance with Sec. 782(q) and Sec. 782(r)).
Carbon Market Assurance
Sec. 341 (p. 676)
This section establishes Part IV of the Federal Power Act, giving FERC oversight and assurance
of carbon markets. FERC shall promulgate regulations for markets for regulated allowances
(emission allowances, compensatory allowances, offset credits, and renewable energy credits).
Among other requirements, the regulations shall: prohibit fraud, market manipulation and
excess speculation; ensure market transparency to allow for efficient price discovery; include
position limits and margin requirements for market participants; limit counterparty risks and
market power concentration risks associated with over-the-counter trading; and establish
standards to qualify for trading facilities for regulated allowances. FERC is given enforcement
authority, including a civil penalty of up to $1 million per day per violation.
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An inter-agency working group is established to promulgate regulations for all markets for
regulated allowance derivatives. Similar requirements as to fraud, market manipulation, etc.,
apply. Default rules prohibit an individual market participant from controlling more than 10%
of the open interest in any regulated allowance derivative and require all regulated allowance
derivative contracts to be through a designated contract market provided for under the
Commodity Exchange Act. Default rules may be superseded by specific rules established by the
working group.
Price or market manipulation, fraud, and false or misleading statements or reports are prohibited
in both regulated allowance markets and regulated allowance derivative markets. Felony
penalties of up to $25 million and imprisonment of up to 20 years can be assessed for violation
of these prohibitions.
Additional Market Assurance
Sec. 351 (p. 701) through Sec. 358 (p. 731)
These sections amend the Commodity Exchange Act to provide additional regulation of certain
derivative transactions involving energy commodities. This includes giving the Commodity
Futures Trading Commission (CFTC) oversight of swaps involving energy transactions and
eliminating the exemption of over-the-counter swaps involving energy commodities. The CFTC
is required to establish uniform speculative position limits for energy transactions and to
eliminate the “swaps loophole.” Among the many other items, several address reporting and
data requirements.
The Commodity Exchange Act is also amended to make clear that nothing in the Act shall be
interpreted to affect the jurisdiction of FERC in regard to FERC authorities under the Federal
Power Act and Natural Gas Act.
The CFTC is the default regulator of carbon derivatives markets, but this can be changed by the
Working Group. The CFTC must oversee the carbon derivatives markets in accordance with the
same regulations that apply to “energy transactions.”
Exchange for State-Issued Allowances
Sec. 790 (p. 602)
Emissions allowances issued by California or the Regional Greenhouse Gas Initiative prior to
December 31, 2011 may be exchanged for emissions issued under Title VII. The exchange shall
provide the entity with an amount sufficient to compensate for the cost of the state allowances.
Relation to State law
Sec. 721(d) (p. 419)
The cap-and trade program established in Title VII of the Clean Air Act does not require any
changes in state rate regulation, the Federal Power Act, or any program for competitive bidding
for power supply in a state in which such program is established.
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Sec. 740 (p. 490)
The Administrator shall issue offset credits for projects that were started after January 1, 2001
and that received offset credits under a GHG emission offset program established by State or
Tribal law or regulation prior to January 1, 2009. The program must also meet certain standards.
Credits are limited to reductions or avoidance of GHG emissions that occur after January 1,
2009, and up to the time the Title VII offset program takes effect.
Sec. 334 (p. 670)
Section 116 of the Clean Air Act (CAA) provides that nothing in the CAA precludes a state (or
a political subdivision) from adopting emission standards or requirements to control air
pollution as long as the state standard is not less stringent than CAA requirements. H.R. 2454
amends Section 116 to include state (or political subdivision) programs that cap GHG emissions
and require submission of allowances or offset credits.
Sec 861 (page 671)
Notwithstanding section 116 of the CAA, no State or political subdivision shall implement or
enforce a cap and trade program that covers capped emissions during the years 2012 through
2017. The term “cap and trade” does not include a target or limit on GHG emissions adopted by
a state or political subdivision that is implemented other than through the issuance and surrender
of a limited number of tradable allowances. It does not include other standards, limits,
regulations, or programs to reduce GHG emissions. And it does not include requirements that
fuels or other products meet an average pollution emission rate or lifecycle GHG standard.
Relationship to Other Parts of the Clean Air Act
Sec. 811 (p. 609)
EPA is required to establish standards of performance under section 111 of the CAA for
stationary sources whose GHG emissions are not capped and that meet certain size
requirements. Standards of performance under section 111 will not be established for GHG
emissions from a capped source.
Sec. 831 (p. 616)
No greenhouse gas may be added to the list under section 108(a) of the CAA on the basis of its
effect on climate change. (Section 108(a) requires the EPA Administrator to list air pollutants
which may reasonably be anticipated to endanger public health or welfare. The Administrator is
obligated to issue air quality criteria for an air pollutant within 12 months after it is listed.)
Sec. 832 (p. 616)
Section 115 of the CAA shall not apply to an air pollutant with respect to that pollutant’s
contribution to global warming.
Sec. 833 (p. 616)
No greenhouse gas may be added to the list as a hazardous air pollutant under section 112 of the
CAA unless it meets the listing criteria independent of its effects on climate change. (Section
112 covers hazardous air pollutants.)
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Sec. 834 (p. 616)
New source review provisions in Part C of Title I shall not apply to a major emitting facility that
is initially permitted or modified after January 1, 2009, on the basis of its emissions of any
greenhouse gas.
Sec. 835 (p. 616)
No stationary source shall be required to operate pursuant to a Title V permit solely because the
source emits any greenhouse gases that are regulated solely because of their effect on global
climate change.
Sec. 727 (p. 460)
The CAA’s Title V permitting program will apply only to stationary sources that are already
subject to Title V. Any permits issued by EPA or a state shall prohibit annual emissions of
greenhouse gases in excess of the number of emissions allowances held by the covered entity. A
covered entity’s statement that it holds sufficient allowances to cover its annual emissions is
sufficient to meet the proposed and approved compliance planning requirements of Title V.
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