News and Analysis • Volume 13 • Number 2 • June 2009

24 - US Climate Legislation Passes First Test in Congress

The first-ever federal legislation to establish nationwide greenhouse gas reduction targets and a carbon trading system is winding its way through US Congress. Although it cleared a first hurdle in May, the road to final passage is expected to be long and contentious.

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The House Energy and Commerce Committee passed the American Clean Energy and Security Act of 2009 on 21 May. Dubbed the Waxman-Markey bill after its authors, the legislation would cap US greenhouse gas (GHG) emissions at 17 percent below their 2005 levels by 2020. The figure corresponds roughly to a 3 to 5 percent reduction from the levels prevailing in 1990, the international benchmark year for emissions cuts under the Kyoto Protocol. While this is a relatively modest target (see table below), it exceeds President Obama’s earlier proposal to bring US emissions back to their 1990 levels by 2020. The bill’s long-term goal is to reduce GHG emissions to 83 percent below their 2005 levels by 2050.
Cap-and-Trade Scheme to Begin in 2012
The main mechanism for reaching these goals would a cap-and-trade system, under which polluting industries would have to purchase greenhouse gas emission allowances from the government, and could trade any surpluses to companies that need more than their allotted share. However, the most trade-sensitive sectors, such as steel and cement, would get full rebates for their compliance costs at least until 2025. Only 15 percent of the pollution rights would be auctioned at the start of the scheme. Similar concessions to heavy industry were made in the European climate change package (Bridges Year 12 No.6, page 19).
The cap-and-trade scheme would start in 2012, when the overall limit to GHG emissions (including carbon dioxide, methane, nitrous oxide, sulphur hexafluoride, perfluorocarbons, nitrogen triflouride and hydrofluorocarbons) would be set at 3 percent below 2005 levels. The bill would also spur the modernisation of the US electrical grid, provide incentives for the expanded production of electric cars, and mandate significant increases in energy efficiency in buildings, home appliances and electricity generation.
International Co-operation
Signalling a change in the US approach to combating global warming, the Waxman-Markey bill states that it is the policy of the United States to “work proactively under the United Nations Framework Convention on Climate Change and, in other appropriate forums, to establish binding agreements, including sectoral agreements, committing all major greenhouse gas-emitting nations to contribute equitably to the reduction of global greenhouse gas emissions.” It further notes that the law seeks to promote a strong global effort to significantly reduce greenhouse gas emissions and to prevent an increase in such emissions in foreign countries as a result of direct or indirect compliance costs incurred by US industry.
No Border Measures, Yet
The legislation contains a number of provisions aimed at coaxing trading partners into participating in global emissions reduction efforts over time, as well as protecting US industry in case the incentives fail to produce the desired effect. The president should decide by mid-2022 how to address competitiveness concerns after 2025.
The heavy industry rebates would be phased out over 10 years if the president determines that more than 70 percent of global output of a sector covered by the US cap-and-trade scheme is produced in countries that fulfil one of the following criteria:
• a nationally enforceable emissions reduction commitment that is at least as stringent as that of the US under an international agreement; or
• participation in an international sectoral agreement with the US; or
• energy- or greenhouse-gas intensity in the sector does not surpass that of the US; or
• emissions reduction policies cost the sector at least 60 percent of the cost of compliance in the United States.
However, if the president determines that less than 70 percent of global output in a sector occurs in countries that meet one of the criteria above, he ‘shall’ decide to either keep the rebates in place, or to require importers of energy-intensive goods to purchase ‘international reserve allowances’ (i.e US pollution permits), or both.
The legislation states explicitly that the International Reserve Allowance Programme may not begin before 1 January 2025. It must be established in a manner that addresses, consistent with international agreements to which the United States is a party, the competitive imbalance in the costs of producing or manufacturing primary products in the US and “the direct and indirect costs, if any, of complying in other countries with greenhouse gas regulatory programmes, requirements, export tariffs, or other measures adopted or imposed to reduce greenhouse gas emissions.” Imports from least-developed countries and others whose GHG emissions represent less than half a percent total global emissions would be exempt.
Despite the caveats, border measures based on criteria such as the cost of energy used or the amount of greenhouse gas emitted in the production process could (and most likely would) be challenged at the WTO.
No Link to China, India Action
At the House Energy and Commerce Committee meeting, Republican Representative Michael Rogers unsuccessfully proposed an amendment that would have ended US greenhouse gas emissions caps if China and India did not adopt standards that were ‘at least as stringent’.
The committee also rejected Republican proposals that would have terminated the cap-and-trade controls if unemployment rose higher than 15 percent, gasoline prices reached US$5 a gallon, or electricity bills rose more than 10 percent on average.
Long Road Ahead
The Energy and Commerce Committee’s acceptance of the Waxman-Markey bill is just the first step in a long and contentious process that will involve numerous committees in both chambers of Congress. A full House vote could take place before August, and President Obama has called upon Congress to pass the legislation before the December climate summit in Copenhagen, which is to set new international targets for greenhouse gas reductions.
‘Cash for Clunkers’
The Energy and Commerce Committee also voted 50-4 to pass a one-year ‘cash-for-clunkers’ programme that would encourage consumers to trade in vehicles with an average fuel economy of less than 18 miles a gallon for more efficient new cars. Those who buy a car that gets at least 10 more miles out of a gallon (or a truck that gains at least five mpg) than the traded-in vehicle would qualify for a US$4,500 voucher, the maximum allowed under the scheme.
The programme will not be limited to cars made in the US. Some trading partners, including the EU, had threatened to challenge the scheme at the WTO if it discriminated against foreign-made vehicles.
New Car Standards
On 19 May, President Obama unveiled new nationwide fuel economy and GHG emissions standards for passenger cars, light-duty trucks and medium-duty passenger vehicles sold in the US. By 2016, the GHG emissions will be capped at 250g/mile. Passenger cars must average 39 miles per gallon (about 6 litres per 100 km), and trucks 30 mpg. The new standards are expected to save 1.8 billion barrels of oil between 2112 and 2116 and decrease GHG emissions by 900 million metric tonnes.