1. BEIJING BRUSSELS CHICAGO DALLAS FRANKFURT GENEVA HONG KONG LONDON LOS ANGELES NEW YORK SAN FRANCISCO SHANGHAI SINGAPORE SYDNEY TOKYO WASHINGTON, D.C. U.S. Climate Change Legislation and Regulation – State of Play and Cross-Border Aspects 21 May 2009 Jan Bohanes Geneva jbohanes@sidley.com

2. 2 Major Concerns Loss ofCarbonLoss of CompetitivenessLeakageEffectiveness

3. 3 Policy Options Internal measures –Free allowances –Output-based rebates External measures –Border tax –Allowance requirement –Sectoral carbon-intensity standard

4. 4 Overview Legislative Action US Congress Waxman/Markey bill Regulatory Action Environmental Protection Agency (EPA) Clean Air Act International Negotiations

5. 5 Waxman-Markey Bill (1) American Clean Energy and Security Act of 2009 110 th Congress saw a number of cap-and-trade bills –many of them with border measures, none voted on 111 th Congress: “dramatically improved” prospects for climate change legislation –President Obama called on lawmakers to send him “legislation with a market-based cap on carbon pollution” –Well-placed advocates in Congress Waxman/Markey bill released on 15 May 2009 –currently in the mark-up process in the Committee on Energy and Commerce in the House of Representatives –previous Discussion Draft, hearings, and adjustments

6. 6 Waxman-Markey Bill (2) American Clean Energy and Security Act of 2009 “A legislative Susan Boyle” Chairman Waxman

7. 7 Waxman-Markey Bill (3) American Clean Energy and Security Act of 2009 Deals with: –Renewable Energy Standards –Energy Efficiency –Emissions Trading Scheme (“cap-and-trade” regime) –Transition to a Clean Energy Economy (including competitiveness and adaptation provisions)

8. 8 Waxman-Markey Bill (4) American Clean Energy and Security Act of 2009 Reductions under the cap-and-trade regime and overall economy –3% below 2005 levels by 2012 –17% by 2020 (overall economy 20%) –42% by 2030 –83% by 2050 Creates a market-place for allowances –allows banking and borrowing Start 2012, phase in complete by 2016

9. 9 Waxman-Markey Bill (5) Specifies distribution of emission allowances to key sectors or for certain key purposes; rest auctioned off Carbon-based rebates –Available to eligible industrial sectors with 5 percent – energy or GHG intensity 15 percent - trade intensity Which sectors? Determined by 2011 –Rebate calculated based on sum of direct carbon factor indirect carbon factor –100 percent through 2025, phase out by 2035

10. 10 Waxman-Markey Bill (6) Allowance requirement on imports (border measure) –President must assess by 2017 effectiveness of rebates in mitigating carbon leakage. –Report must also include recommendations on the International Reserve Allowance Program (IRAP); and on assistance to affected industries by other developed countries –By 2020, President must “notify foreign countries that an [IRAP] may apply”

11. 11 Waxman-Markey Bill (7) Allowance requirement on imports –By 2022, President must determine whether more than 70 percent of global output for covered sectors comes from countries that are party to an international climate change agreement (overall or sectoral) have an energy or GHG intensity same or lower as US have implemented policies that impose an incremental cost increase at least 60 percent of cost of US program “responsible countries”

12. 12 Waxman-Markey Bill (8) Allowance requirement on imports –If 30 percent or more from countries that do not satisfy any of these criteria, President must assess rebates and the IRAP and modify amount of rebates and/or implement the IRAP for the relevant sector –The IRAP may not begin until 2025 exemptions for LDCs and low emission countries

13. 13 Waxman-Markey Bill (9) What is the stated purpose of the IRAP? –Administrator is to design the IRAP program “in a manner that addresses, consistent with international agreements to which the United States is a party, the competitive imbalance in the costs of [production]...” –Explicitly stated preference for achieving goals through international negotiations

14. 14 Waxman-Markey Bill (10) What is the support for such legislation? –Administration and well-placed advocates –difficult economic times –Party lines not a wholly accurate predictor Further steps: –Mark-up finished by Memorial Day (25 May)? –Approval by the House of Representatives –Subsequent action by the Senate –Signature by President

15. 15 Van Hollen “Cap and Dividend” Bill (H.R. 1862) (introduced April 1, 2009) Implements cap-and-trade system on entities selling fuel Permits auctioned by US Government, proceeds distributed as “dividends” to US taxpayers Imposes carbon equivalency fee at border –on imports of carbon-intensive goods –equal to carbon cost to domestic producers Pays carbon equivalency amount to exporters –of carbon-intensive goods –equal to carbon cost to domestic producers Border measures cease if –international climate change agreement reached –exporting country implements measures equivalent to US measures

16. 16 Overview Legislative Action US Congress Waxman/Markey bill Regulatory Action Environmental Protection Agency (EPA) Clean Air Act International Negotiations

17. 17 Regulatory Action by the EPA under the Clean Air Act In 2007 Supreme Court rules that CO2 fits within the definition of “air pollutant” in the Clean Air Act Pres. Bush directs EPA to respond EPA has issued an Advance Notice of Proposed Rulemaking (ANPR)

18. 18 Regulatory Action by the EPA under the Clean Air Act (2) Far-reaching regulatory action –mobile sources (from lawnmowers to heavy-duty trucks) –stationary sources? (residential and industrial) –standards on renewable energy, energy efficiency –product lifecycle standards, e.g. for fuels (including GHG emissions during production) But may not implement a cap-and-trade regime (?) and cannot provide subsidies to affected industries –also no authority to impose border measures

19. 19 EPA action vs. legislative action EPA regulatory action runs parallel to legislative process, until legislation is enacted –Waxman/Markey bill would preempts EPA action EPA regulatory process provides Obama administration with leverage to get legislation enacted –EPA regulation comes without any subsidies or cap-and-trade flexibility However, EPA regulatory process might also be an incentive for Administration and Congress to avoid passing legislation that might cost a lot of jobs

20. 20 How do these developments affect international negotiations? Enactment of legislation would signal willingness and ability of US to commit to binding reduction targets What if by December a bill has cleared only the House, and not yet the Senate? Provision for border measures – its effects on international negotiations –source of leverage gone? –less confrontational/unilateral