Rhein on Energy and Climate

Since May 12, 2010 a new draft for an American Power Act is on the table. Senators Kerry and Liebermann have submitted a 1000 page (!) compromise proposal after a previous trilateral effort could not make the way to the Senator Floor because of party controversy concerning the priority to be attributed to immigration over climate legislation.

The new compromise text sticks to the 2020 emission reduction target of 17 percent over 2005. It states more explicitly the 83 percent reduction target for 2050, also shared by the Administration.

The bill recommends a cap and trade system comparable to the EU scheme. Its introduction will proceed slowly. As of 2013 it will cover the power sector; industry will be phased in starting in 2016. Only 7.500 US companies, (compared to 12 000 in the EU) emitting more than 25.000 tons of C02 per year, will be subject to cap and trade.

As in the EU climate scheme, companies will be able to offset national emissions by international green projects or the purchase of green credits, within an overall ceiling of two billion (!) tons of C02.

To avoid excessive fluctuations of C02 market prices the government will set floor and ceiling prices. Initially their level will be very moderate, $ 6/ton as a floor, and $ 25/ton as the ceiling (compared to present US C02 prices of only $ 2/ton). They will be raised annually, the floor price by 3 percent and the ceiling price by 5 percent over the inflation rate.

To further encourage the reduction of emissions the bill provides for complementary measures:

The government will be held to invest $ 2 billion annually in carbon capture and storage with the objective of deploying 72 GW of coal-fired power plants and making the USA the world leader in CCS technology.

To boost nuclear power development it provides for a package of financial incentives ranging from accelerated depreciation allowances to $ 54 billion loan guarantees and risk insurance payments.

To placate the opposition from industry against any climate legislation, the bill provides for border adjustment levies on imported goods that are not subject to comparable climate requirements.

The transport sector would be hit via refineries having to buy C02 allowances at fixed prices.

In addition, the Administration will invest more in mass transit systems, encourage trucks to switch from petrol to gas and support the development of high-efficiency automobiles

Viewed from a European perspective all this does not fly very high, though not even this modest proposal has much chance of being adopted by the Senate.

In any event it will take months before the US President might be able to sign the legislation into law. The House and the Senate will have to agree with the Senate on a joint bill; and this text will have to return to the Senate for final approval.

Even if it were to become law in time for the Cancun climate Conference starting end of November this will not radically change its outcome.

The emerging countries are unlikely to consider the Act as more than a first gesture:

And other developed countries will have to adopt action that should be at least comparable to the US legislation.

Still, it would be a landmark. It would signal to the world that the USA has understood the message. It will set in motion a mechanism of steadily rising carbon prices for the 7.500 enterprises mainly responsible for US C02 emissions. Business would learn to live with it and realise that higher energy prices will not destroy jobs or undermine their existence.

But the bill might indicate the way for the Executive to pursue in case of failure. Indeed, in conformity with the US Clean Air Act, the President might – and should – instruct the Environment Protection Agency (EPA) to enact the major measures, including its Cap and Trade regime, contained in the bill.

Whatever the imperfections of what might finally emerge as the result of 18 months of legislative efforts, the EU should cautiously encourage those behind the Kerry-Lieberman Bill to pursue their tenacious efforts. In parallel, the European Business lobbies should convince the American Chamber of Commerce to abandon its opposition to US climate legislation.

Brussels 15.05.10 Eberhard Rhein

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