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"An Overview of the Carbon Capture and Sequestration and Cap-and-Trade Provisions of the American Power Act " Fulbright Alert Edward Clark Lewis , Les Lo Baugh , Rebecca Koch Skiba and Avery Emison Carson May 14, 2010 An Overview of the APA On May 12, 2010, Senators John Kerry and Joe Lieberman released their latest discussion draft bill aimed at reducing greenhouse gas emissions and spurring clean technology development.[1] This bill, named the American Power Act is the latest push in a series of attempts to enact comprehensive climate change legislation. The announcement of the draft American Power Act bill was followed just one day later by the finalization of the Environmental Protection Agency’s (“EPA”) greenhouse gas tailoring rule on May 13, 2010, which essentially provides permitting requirements for large emitters of greenhouse gases. Prior to the ongoing situation in the Gulf of Mexico, the bill’s sponsors, who at that time included Senator Graham, indicated that the bill would relax prohibitions on offshore drilling. As released, the bill offers some expansion of offshore drilling, but allows states to “opt out” of drilling up to 75 miles from their shores. However, the bill encourages states to allow offshore drilling by assigning 37.5% of revenues from drilling off of their coasts. The bill continues to offer wide-ranging incentives to develop nuclear power, including expanded federal loan guarantees for nuclear power. Given the competing interests at work in Congress this session, it is difficult to predict how the final version of the bill will change, and its chances of ultimately making it to the President’s desk. However, the final promulgation of EPA’s greenhouse gas tailoring rule may provide sufficient incentive for Congress to overcome bipartisan difficulties and pass a bill as a preferable alternative. In its current form, the American Power Act would limit EPA’s authority to require operating or pre-construction permits for greenhouse gas emissions from “covered entities” under existing Clean Air Act programs. Further, the bill would preempt state greenhouse gas cap-and-trade programs so as to provide uniformity across the nation. This client alert examines the carbon capture and sequestration and cap-and-trade provisions of the bill as they are currently written. Key Environmental Provisions in the American Power Act At its core, the American Power Act establishes economy-wide carbon reduction goals. Using 2005 emissions as a baseline, the bill establishes a goal of reducing emissions to 95.25% of 2005 emissions by 2013; 83% of 2005 emissions by 2020; 58% of 2005 emissions by 2030; and 17% of 2005 emissions by 2050. Discussion Draft § 702. I. Carbon Capture and Sequestration The bill includes a significant focus on Carbon Capture and Sequestration (“CCS”) to encourage development of CCS on a widespread basis by January of 2030 through various national strategies. Discussion Draft § 1401. Further, pursuant to a special funding program, assessments would be placed on electric utilities for their use of fossil fuel-based power sold to electric customers. Finally, to support commercial scale CCS, Section 1431 directs the Administrator to establish regulations for the distribution of emission allowances, including incentives for facilities to deploy CCS early and for facilities that capture larger amounts of carbon dioxide. II. Standards of Performance for New Coal-Fired Power Plants The bill amends the Clean Air Act to add a performance standard for utility plants that require a Section 503(a) permit and derive at least 30% of their heat energy from coal or petroleum coke. Units that were “initially permitted” for a preconstruction permit after January 1, 2009, and until December 31, 2019, would be required to reduce their carbon dioxide emissions by 50% by January 1, 2020, or four years after the EPA determines that certain CCS technologies have been implemented, whichever comes first. Facilities initially permitted after January 1, 2020, would be required to demonstrate a 65% reduction in carbon dioxide emissions on an annualized basis. The term “initially permitted” is intended to cover projects that have received a preconstruction permit, with the understanding that the permit might not be finalized due to administrative or litigation challenges. Discussion Draft § 801. III. Market-Based Initiatives (Cap-and-trade) The bill amends the Clean Air Act to add Title VII, which governs greenhouse gas reduction through market-based regulatory programs. State cap-and-trade programs are preempted, as is regulation of “covered entities” by EPA under the pre-existing construction and operating programs promulgated pursuant to authority from the Clean Air Act. Greenhouse gas emissions from “covered entities” are to be reduced at the same rate as the economy-wide goals discussed above. The basic scheme of the bill is to require emitters of fossil-fuel based carbon dioxide, methane, nitrous oxide, sulfur hexafluoride, hydrofluorocarbons emitted as a byproduct, perfluorocarbons, and nitrogen trifluoride, to hold allowances or offsets in excess of their annual emissions.[2] Discussion Draft § 711. Greenhouse gases are measured in units of carbon dioxide equivalent—that is, the measure of climate change damage that would be exacted by one metric ton of carbon dioxide.[3] In support of these market-based incentives, the act establishes reporting requirements for certain emitters of carbon dioxide. Discussion Draft § 713. A. Covered Sources The market-based provisions apply to “covered entities.” As the definition of “covered entities” is the key to determining which industries will be most affected by the bill, this defined term is likely to remain in flux. Currently, “covered entities” includes, among many other categories, any electricity source or refined product provider, as well as stationary sources emitting 25,000 tons per year or more carbon dioxide equivalent. The market-based requirements take effect in 2013, but for certain industrial sources and natural gas distribution companies, the requirements are delayed until 2016. B. Allowances The bill establishes an initial number of allowances starting in 2013, which gradually decrease through 2050, although the bill gives EPA the flexibility to adjust the allowance levels if necessary. Discussion Draft § 721. Emissions levels are set on an annual basis, with the exception of refiners. Given the unpredictability of a refinery’s future emissions, the bill directs EPA to set aside an estimated number of allowances for all refiners at a set price. Then, the refiners simply pay EPA at the end of each quarter for the number of allowances used. Unlike other allowances, these cannot be traded or banked. Discussion Draft § 722. For electricity sources, stationary sources and refiners, the bill requires one emission allowance for each ton of carbon dioxide equivalent gas emitted. Id.§ 722. For producers and importers of industrial gas, the bill requires one emission allowance for each ton of carbon dioxide equivalent produced or imported for sale in interstate commerce. Id. For natural gas distributors, the bill requires one emission allowance for each ton of carbon dioxide that would be emitted by the combustion of the gas. C. Offsets In addition to using allowances to meet the requirements of the bill, entities may also use up to 2,000,000,000 tons of offset credits per year, depending on the size of the emitting facility. Id. The bill establishes an advisory board to ensure the integrity of offset credits. Although the board determines which kinds of activities count as offsets, the statute directs the board to include methane collection from mines and landfills, fugitive emission flares and reforestation, among other projects. Id. § 734. IV. Permitting Covered entities that are also stationary sources would be subject to incorporation of the carbon dioxide requirements into their Title V permits. It appears that the provisions would be incorporated into the permits upon renewal. States administering Title V would incorporate the provisions into the state programs. Id. § 727. For entities that are not “covered entities” under Title VII, the bill directs EPA to establish standards of performance relating to stationary sources. Discussion Draft § 2302. Conclusion In conclusion, legislation aimed at reducing greenhouse gas emissions continues to present the next great potential frontier of environmental law, assuming it becomes law in one form or another. Significant hurdles remain to the Senate passing a bill and then reconciling the Senate bill with the bill previously passed by the House of Representatives. President Obama has repeatedly affirmed that climate change is a priority. However, it is but one of many goals of the current administration that require the cooperation of Congress. Even with the apparent efforts at bi-partisanship, only time will tell if U.S. climate change legislation will become a reality. This article was prepared by Edward C. Lewis (elewis@fulbright.com or 713 651 3760), Les Lo Baugh (llobaugh@fulbright.com or 213 892 9290), Rebecca K. Skiba (rskiba@fulbright.com or 713 651 5303) and Avery Carson (acarson@fulbright.com or 713 651 8261) from Fulbright's Climate Change Practice Group, Environmental Law Practice Group and Energy Practice Group. ----- [2] The bill gives the EPA the potential to regulate emissions of certain fluorinated substances in an alternative regulatory scheme which subjects emitters of the chemicals to a Best Achievable Performance Standard. Discussion Draft § 714. [3] This provision is important because some chemicals have a conversion factor of as much as 20,000 metric tons to one ton of carbon dioxide. |
