U.S. Climate Change Legislation and Regulation – State of Play and Cross-Border Aspects

1. U.S. Climate Change Legislation and Regulation – State of Play and Cross-Border Aspects Jan Bohanes Geneva jbohanes@sidley.com 21 May 2009

2. Major Concerns <-------------------------------------------------------------------> Loss of Carbon Loss of Competitiveness Leakage Effectiveness

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

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

5. Waxman-Markey Bill (1)American Clean Energy and Security Act of 2009 • 110th Congress saw a number of cap-and-trade bills • many of them with border measures, none voted on • 111th 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. Waxman-Markey Bill (2)American Clean Energy and Security Act of 2009 “A legislative Susan Boyle” Chairman Waxman

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

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. 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. 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. 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