Kerry and Lieberman Release Draft Climate Bill While EPA Issues Final Tailoring Rule

The Kerry-Lieberman climate bill has arrived. On May 12, 2010, Sen. John Kerry (D-Mass.) and Sen. Joe Lieberman (I-Conn.) released their long-awaited "discussion draft" of climate change legislation. The draft bill, which weighs in at 987 pages and is called the "American Power Act," will inevitably face an array of political challenges.

While the bill initially had at least some bipartisan support, Sen. Lindsey Graham (R-S.C.) dramatically withdrew as a co-sponsor just before the bill was originally scheduled for release on April 26, citing reasons relating to immigration reform.

That by itself strikes a blow to the bill's chances. But more, the release comes at a time of increasing rancor and unrest both across the political aisles and even within the Republican party itself, not to mention in the midst of a major and worsening oil spill in the Gulf of Mexico.

Complicating matters, the EPA recently announced the release of its final tailoring rule, which sets up an implementation scheme for regulating greenhouse gases under the currently existing PSD and Title V permitting programs of the Clean Air Act. Meanwhile, several lawsuits over the environmental impacts of climate change continue to percolate in the courts, creating the specter that judges and juries could impose their own form of greenhouse gas regulation.

Kerry has purportedly spent months meeting and negotiating with industry representatives in order to garner support for the bill. To that end, he has predicted that many of the country's major greenhouse gas emitters will support the bill, although at least publicly that support has yet to materialize. Nevertheless, all things being equal, many of the major greenhouse gas emitters may still perceive federal legislation as the optimal solution.

Key Provisions of the Kerry-Lieberman Bill

Cap-and-trade System for Regulating Greenhouse Gas Emissions

The proposed targets are, for the most part, consistent with the Waxman-Markey bill that passed the House in June 2009. Kerry-Lieberman calls for a 17 percent reduction in economy-wide greenhouse gas emissions by 2020 (over 2005 levels), 3 percent less than the 20 percent reduction proposed in the Kerry-Boxer bill last fall. The remaining targets are the same as in both Waxman-Markey and Kerry Boxer—most notably, the 83 percent reduction target for 2050. The one exception is that Kerry-Lieberman proposes a slightly more rigorous 4.5 percent target for 2013 as opposed to a 3 percent target for 2012.

The Kerry-Lieberman proposal also extends the phase-in period over previous legislative proposals, with power plants, transportation fuels, and certain producers and importers of greenhouse gases subject to regulation in 2013, and large industrial sources and natural gas distributors subject to regulation in 2016. This extended phase-in period is one key difference over the Waxman-Markey bill, which began implementation in 2012 and phased in industrial sources by 2014.

Another important feature of the draft bill is a "price collar" on emissions allowances. Allowance prices initially start at $12 per ton (slightly higher than Waxman-Markey) and are effectively capped by a $25 per ton reserve price, escalating at 5 percent per year over the inflation rate. This, likewise, is lower than the $28 "minimum" price established in Waxman-Markey. Kerry-Lieberman also authorizes allowance trading in an open market for most allowances, although trading of allowances in the petroleum fuel sector is prohibited.

Some of the additional features of the cap-and-trade program are as follows:

The bill defines "covered entity" nearly identically with Waxman-Markey, including stationary sources at or above the 25,000 metric ton CO2e/yr threshold along with several all-in categories in certain industrial sectors Like Waxman-Markey, the bill allows for unlimited "banking" of allowances, and some limited "borrowing" of allowances, in order to dampen fluctuations in allowance pricing across compliance periods The bill calls for the creation of a "Cost Containment Reserve" funded with 4 billion allowances, intended to cap the price of allowances to an initial price of $25, escalating by 5 percent plus inflation each year thereafter The bill includes a huge allowance for "offsets"—up to 2 billion tons annually—under a hybrid program to be jointly promulgated by the EPA and USDA. Waxman-Markey called for two distinct offset programs to be administered by these agencies...