Climate Change Gets Specific – Evolution of Legislation and ACES Victor B. Flatt, Tom and Elizabeth Taft Distinguished Professor of Environmental Law, UNC-Chapel Hill; Distinguished Scholar GEMI

Evolution of Cap and Trade Bills  McCain-Lieberman  Lieberman-Warner  Dingell-Boucher  Waxman-Markey (ACES), passed out of house in June.

Important Issues in Federal Cap & Trade  Target, and target timeline  How will GHG allowances be allocated  How much of the economy covered  Adaptation funding  Offset definition and restrictions  “Safety” Valve  Who will Administer  Pre-emption and Benefits of Early Action

Senate Timeline and Politics  Originally scheduled vote before August recess – now September  Looking for Republican co-sponsors –Snowe, Collins, Murkowski, McCain, Graham –Alexander seems to be out  60 votes possible (3 democratic defections predicted with high certainty – Nelson, Landrieu, Byrd)  Compromises necessary?  Alaska funding; possible natural gas role?

U.S. Federal Legislation Waxman- Markey (now ACES) voted out of house  Important Details –Coverage –Target Reduction –Allocation –Administrative Oversight and Market –Offsets

Target Goals (G-8 agrees to 2 C rise limit) 83% reduction of 2005 levels by 2050  17% reduction of 2005 levels by 2020 –Initial draft had 20% by 2020 –New draft claims with additional controls outside cap, will still reach 20% –IPCC recommends 25-40% below 1990 levels by 2020, but goal is only about 7% below 1990 levels by –EU looking at 25%  Large Coverage –Over 85% of emissions

ACES How Allocated  15 % auctioned per year  Initially, other percentage given away  Approx. 59% to industry; 25% for needs/interest of public- adaptation, enviro, etc…

Annual allowances (in millions) (sec. 721) YEARALLOWANCES , , ,099 *INC COVERAGE , ,482*INC COVERAGE , , , , , , , , , , , , , ,533 YEARALLOWANCES , , , , , , , , , , , , , , , , , , , and each year thereafter 1,035

Allowance allocation to Regulated Entities 35% for electric utility sector; –Last version gives percentage to rural electric cooperatives; fight over allocation  15% for carbon-intensive industries, such as steel and cement, in 2014 (reduced by 2% every year)  9% for local natural gas distribution companies, in 2016 (reduced to zero between 2026 and 2030)  3% for automakers toward advanced technologies through 2017 (reduced to 1% from 2018 and 2025)  2% for oil refineries from 2014 to 2026  2% for carbon capture and storage technology from 2014 to 2017 (increases to 5% after 2018)

Allowance allocation (cont.) To states and other funds:  10% for states for renewable energy and efficiency investment from 2012 to 2015 (reduced to 5% between 2016 to 2022)  5% for tropical deforestation prevention projects  2% for domestic adaptation to climate change between 2012 and 2021 (increases to 4% between 2022 to 2026, to 8% in 2027)  2% for international adaptation and clean technology transfer from 2012 to 2021 (increases to 4% between 2022 to 2026, to 8% in 2027)  1.5% for programs helping home heating oil and propane users (reduced to zero between 2026 and 2030)  1% for Clean Energy Innovation Centers for R&D funding  0.5% for job training from 2012 to 2021 (increases to 1% after 2022)

Modified Formula in passed bill  Emission Allowance Rebate Program  For Carbon Intensive Industry declining through 2035  Read in Conjunction with prior authorized distributions

Offsets  Larger amount available than prior proposals– usually 2 billion tons of CO2 equivalent per year  Varies between 15% and 70% of total over life of bill  Split between domestic and foreign  Foreign subject to 25% penalty  When Passed – set up list of existing offsets

Offsets Cont.  Domestic offset sequestration reversals that are “unintentional” may not be made fully whole (statute calls for 50% replacement)  Possibility of offset failure could infect the secondary markets  Complexity and Controversy – Expect to see changes with offsets

Offsets to USDA  Major Change – USDA jurisdiction over all land based offsets and sequestration – most  Also “term” offsets  Positive – USDA has more staffing worked with farmers  Negatives – role of watchdog? Loopholes?  Negative – no environmental review; complication with pre-emption – California  EPA oversight role? Senate compromise

Market Details  FERC in charge of initial allocation/auction  Might be transferred to CFTC  CFTC in charge of regulating “secondary” markets, i.e. markets in all financial or other contractual, risk-hedging instruments containing carbon allocations or offsets (regulated like other commodities)  Initial offset contracting exempt from this  Looking at a restriction in all commodity trading from financial crisis.  All OTC WILL have to be “cleared.”  Safety Valve