Market-Based Greenhouse Gas Control: Selected Proposals in the 111th Congress
Released: 2010-05-18T00:00:00

Summary:
As of the date of this report, Members in the 111th Congress have introduced nine stand-alone proposals that would control greenhouse gas (GHG) emissions. The proposals offered to date would employ market-based approaches—either a cap-and-trade or carbon tax system, or some combination thereof—to reduce GHG emissions. The legislative proposals are varied in their overall approaches in controlling GHG emissions. Some control emissions by setting a quantity (or cap); others control emissions by setting a price (or tax/fee). In addition, the proposals differ in their inclusion of particular design elements, such as whether or not to allow offsets (emission reduction opportunities from economic sectors not directly addressed by the primary approach).
H.R. 2454, the American Clean Energy and Security Act of 2009 (Waxman/Markey), and S. 1733, the Clean Energy Jobs and American Power Act (Kerry/Boxer), have been the primary energy and climate change legislative vehicles in the 111th Congress. On June 26, 2009, the House passed H.R. 2454. On November 5, the committee approved Senator Boxer's "Manager's Amendment" as a substitute, and ordered S. 1733 reported. In addition to establishing a cap-and-trade system to regulate GHG emissions, both H.R. 2454 and S. 1733 would address energy efficiency, renewable energy, and other energy topics. Other proposals—H.R. 1862 (Van Hollen) and H.R. 1666 (Doggett)—would control emissions by limiting quantity, but would differ in their structure and implementation.
Three of the proposals—H.R. 594 (Stark), H.R. 1337 (Larson), and H.R. 2380 (Inglis)—would use a carbon tax approach to address carbon dioxide (CO2) emissions from fossil fuel combustion.
Other proposals do not fit precisely into either a price or quantity control category. H.R. 1683 (McDermott) would establish a program that may be described as a dynamic carbon tax: its tax rate would be linked with annual emission allocations (or caps). S. 2877 (Cantwell) would establish a CO2 emission control program on fossil fuel producers and importers. Although the bill would limit the number of carbon shares auctioned each year, the auctions would include a price safety valve, allowing for the purchase of additional shares. To counter the emissions from these additional shares (above the cap), the price safety-valve revenues would be used to support mitigation efforts outside of the emission control program.
On May 12, 2010, Senators Kerry and Lieberman released a draft of new climate change legislation. A comprehensive energy and climate change policy proposal, the draft would set GHG reduction goals similar to those of H.R. 2454. The proposal would employ a market-based cap-and-trade scheme for electric generators and industry with a separate set-price mechanism to allocate allowances to cover transportation fuels.
A key element in GHG emission reduction bills is how, to whom, and for what purpose the value of emission allowances or carbon tax revenue would be distributed. The distribution strategy is a critical policy decision, because it would affect (1) the overall cost of the program and (2) how program costs are distributed throughout the economy. In the early years of the program, H.R. 2454 and S. 1733 would distribute allowances at no cost to both covered and non-covered entities to support various policy objectives. In addition, an increasing percentage of the allowances would be sold through auction. As with the distribution of no-cost allowances, auction revenues would be used to further various policy objectives.

subsections: section_title: Introduction
paragraphs: A diverse array of efforts to reduce greenhouse gas (GHG) emissions is currently under way or being developed on the international, national, and sub-national level (e.g., individual state actions or regional partnerships). Proposals in the U.S. Congress have generally focused on market-based approaches, but some proposals have included a mix of market and non-market strategies.
Market-based mechanisms that limit GHG emissions can generally be divided into two types: quantity control (e.g., cap-and-trade) and price control (e.g., carbon tax or fee). To some extent, a carbon tax and a cap-and-trade program would produce similar effects: both are estimated to increase the price of fossil fuels, which would ultimately be borne by consumers, particularly households. Preference for a carbon tax or a cap-and-trade program ultimately depends on which variable one wants to directly control—emissions or costs.
Although Members have introduced and debated GHG emission control proposals—both cap-and-trade and carbon tax programs—in previous Congresses, the Obama Administration's stated commitment to GHG emission reduction has spurred interest in developing a workable program. This position contrasts starkly with the previous Administration, which had rejected the concept of mandatory emissions reductions, instead focusing on voluntary initiatives to reduce the growth in GHG emissions (i.e., emissions intensity targets).
In addition to the policy shift in the executive branch, a number of states have taken actions in recent years that directly address GHG emissions. For example, 23 states have joined one of the three regional partnerships that would require GHG (or just carbon dioxide) emission reductions. One of these partnerships—the Regional Greenhouse Gas Initiative (RGGI)—took effect January 2009. Industry stakeholders are especially concerned that the states will create a patchwork of climate change regulations across the nation. This prospect is causing some industry leaders to call for a federal climate change program. Some have stated a preference for a cap-and-trade system; others have indicated a preference for a carbon tax approach.
Another potential driver of market-based federal legislation is activity by the Environmental Protection Agency (EPA) to control GHG emissions under existing Clean Air Act authority. On December 15, 2009, EPA finalized an "endangerment finding" under Section 202 of the Clean Air Act, which requires the agency to regulate pollutants due to their GHG impacts. In addition, on May 19, 2009, President Obama announced a plan to integrate federal fuel economy standards (under the Energy Policy and Conservation Act) with federal vehicle emissions standards (under the Clean Air Act) and state standards (driven by California's rulemaking action). The Administration finalized GHG and fuel economy standards in the May 7, 2010, Federal Register .
In the context of these events and efforts, Members in the 111 th Congress have introduced several proposals that would use market-based approaches to reduce GHG emissions. This report focuses on these legislative proposals.
section_title: Legislative Proposals
paragraphs: In the 111 th Congress, Members have introduced nine bills that include provisions to impose or permit some form of market-based controls on GHG emissions. General descriptions of these bills follow. The major provisions of the House bills are compared in Table 1 ; the Senate bills are compared in Table 2 .
H.R. 2454 , introduced May 15, 2009, by Representatives Waxman and Markey, passed the House on June 26, 2009. It includes numerous energy policy provisions as well as cap-and-trade provisions (Titles III, IV, and V). H.R. 2454 would set up a cap-and-trade system that would reduce GHG emissions from covered sources to 17% below 2005 levels by 2020 and 83% below 2005 levels by 2050. Covered entities would account for approximately 85% of U.S. total GHG emissions. The proposal would allow covered entities to submit offsets to cover an increasing percentage (approximately 27% in 2016) of compliance obligations. Unlike previous cap-and-trade proposals (from previous Congresses), the program would create a rolling two-year compliance period. H.R. 2454 would distribute allowances to both covered and non-covered entities at no cost to support various policy objectives. In addition, an increasing percentage (approximately 17% in 2016) of the allowances would be sold through auction. As with the distribution of no-cost allowances, auction revenues would be used to further various policy objectives.
S. 1733 , introduced September 30, 2009, by Senator Kerry, was ordered reported by the Senate Committee on Environment and Public Works on November 5, 2009. Largely similar to H.R. 2454 , S. 1733 would establish an economy-wide GHG cap-and-trade program, while addressing other energy-related matters through numerous energy policy provisions. Although the similarities outweigh the differences, six key distinctions include the following: (1) the Senate bill has a more stringent emissions cap between 2017 and 2029; (2) the two bills allocate emissions allowances and auction revenue to different recipients at different levels; (3) the bills would treat offsets differently; (4) the House bill would establish extensive carbon market regulation (the Senate bill currently has a placeholder for this topic); (5) the House bill would establish a requirement that importers purchase special emission allowances for certain imports from countries without greenhouse gas controls (the Senate bill currently has a placeholder for this topic); and (6) both bills would limit EPA's authority to regulate greenhouse gases under the Clean Air Act, although in different ways. For a more comprehensive comparison between H.R. 2454 and S. 1733 , see CRS Report R40896, Climate Change: Comparison of the Cap-and-Trade Provisions in H.R. 2454 and S. 1733 , by [author name scrubbed], [author name scrubbed], and [author name scrubbed].
H.R. 594 , introduced January 15, 2009, by Representative Stark, would impose a carbon-content tax on fossil fuels starting at $10/ton and increasing by $10 every year. The tax would apply to fossil fuels as they enter the U.S. economy (i.e., at the production or importation level). The bill does not specify how the tax revenues would be applied. 
H.R. 1337 , introduced March 5, 2009, by Representative Larson, would impose a carbon-content tax on fossil fuels starting at $15/ton. The tax would increase by $10 each year, but if identified emission targets (established by EPA, based on reaching 80% below 2005 emissions by 2050) are not met, the tax would increase by $15 in that year. The tax revenues would be used to support (1) a payroll tax rebate; (2) affected industry transition assistance; and (3) clean energy technology. The vast majority of the revenue would support the payroll tax rebate. The proposal also would impose a carbon equivalency fee on imported carbon-intensive goods.
H.R. 1666 , introduced March 23, 2009, by Representative Doggett, would establish a cap-and-trade program to reduce greenhouse gas emissions from covered sources from 6.2 billion metric tons in 2012 to 253 million in 2050. The program would be administered through the Department of the Treasury and 100% of the allowances would be auctioned. In order to mitigate price volatility in the early years of the program, the bill would establish a Climate Program Oversight and Coordination Board to set targets for allowance prices and manage quarterly auctions to maintain a smooth allowance price path. The managed price program would run from 2012 through 2019, and, depending on a review, revisions would be made for 2020 and beyond. If the price path resulted in excess emissions from the expectations set out in the bill, those emissions would be made up through additional reduction in the years 2020 through 2030. Auction revenues would be put in an Auction Revenue Trust Fund at Treasury, but no specific purpose is delineated in the bill for them.
H.R. 1683 , introduced March 24, 2009, by Representative McDermott, would establish a hybrid approach to GHG emission control. The approach may be described as a dynamic carbon-content tax. Producers and importers of GHG emission substances—fossil fuels and other GHG emission inputs—would be required to purchase emission permits for each ton of emissions that would occur from the combustion or use of the GHG emission substance. Permits may not be traded or exchanged, thus the purchase requirement would effectively act as a carbon-content tax (or fee). The Department of the Treasury would determine the (annual) price for emission permits based on annual emission allocations (or caps) identified in the bill. Treasury would publish price schedules every five years, but the sale price may be modified (under certain conditions and to a limited extent) within the five-year periods. If the permits sold exceed allocations allotted in a particular year, subsequent year allocations would be reduced, thus imposing an overall cap. 
H.R. 1862 , introduced April 1, 2009, by Representative Van Hollen, would cap emissions associated with the combustion of CO 2 . Fossil fuel producers and importers would be required to surrender carbon permits in relation to the carbon dioxide emissions generated through the combustion of fossil fuels the entities sold during the previous year. The cap would decline annually, leading to an 85% reduction below 2005 CO 2 emissions from covered entities by 2050. All of the carbon permits would be sold through an auction process. Nearly 100% of the auction proceeds would be redistributed monthly to those with a social security number.
H.R. 2380 , introduced May 13, 2009, by Representative Inglis, would impose a carbon-content tax on fossil fuels starting at $15/ton. The tax rate would increase by an equal percentage each year (approximately 6.5%), until it reached $100/ton in 2040 (not including inflation adjustments). All of the tax revenue would be used to offset reductions in the payroll tax paid by employees, employers, and self-employed persons. The proposal would impose a tax on carbon-intensive imported goods.
S. 2877 , introduced December 11, 2009, by Senator Cantwell, would create a program that seeks to combine both emission and price control. The program would apply only to CO 2 emissions (covering 80% of U.S. GHG emissions), requiring fossil fuel producers (e.g., coal mines, wellheads) and importers to submit "carbon shares" for the carbon dioxide (CO 2 ) emissions related to the fossil fuels they produce or import. The President would limit (or cap) the quantity of carbon shares available for submission each year, and the Department of Treasury would distribute all of the carbon shares through monthly auctions. The auctions would have a price floor and a price ceiling (i.e., safety valve). If the price ceiling were reached in a given auction, additional carbon shares would be sold to accommodate all bids. Offsets would not be allowed for compliance purposes; however, if the price ceiling is reached during an auction—the possibility of which would be increased by not allowing offsets—revenues from the additional carbon shares would be used exclusively on domestic mitigation activities, including offset-like projects from agriculture and forestry sectors. S. 2877 would distribute 75% of its auction revenue to individuals on a monthly basis; the remaining 25% would be allotted (through the appropriations process) to support a range of policy objectives.
Two bills— H.R. 1759 and S. 2729 —have been introduced to address specific issues. H.R. 1759 , introduced by Representatives Inslee and Doyle on March 26, 2009, would set up an allowance distribution scheme to assist energy-intensive industries that are trade-exposed and potentially subject to carbon leakage. S. 2729 , introduced by Senator Stabenow on November 4, 2009, includes (among other provisions) comprehensive offset provisions that could serve as an alternative to offset program text in other cap-and-trade proposals.
On May 12, 2010, Senators Kerry and Lieberman released a draft of new climate change legislation. A comprehensive energy and climate change policy proposal, the draft would set GHG reduction goals similar to those of H.R. 2454 . Employing a market-based cap-and-trade scheme for electric generators and industry with a separate set-price mechanism to allocate allowances to cover transportation fuels, the proposal allocates a substantial percentage of the allowances created for the benefit of energy consumers and low-income households. As the program proceeds through the mid-2020s, it shifts to more government auctioning with most of the proceeds returned to households. The bill's allocation scheme includes free allowance allocations to energy-intensive, trade-exposed industries, and other measures to prevent carbon leakage. While it is expected that the Kerry-Lieberman proposal would be rolled into S. 1462 , it does contain other energy initiatives, including incentives for nuclear power, carbon capture and storage technology, and natural gas vehicles.
section_title: Legislative Activity
paragraphs: H.R. 2454 (Waxman/Markey, introduced May 15, 2009) was subsequently modified (both technical and substantive changes) and offered as a "Manager's Amendment" on May 18, 2009. On that day, the bill began markup in the House Committee on Energy and Commerce. After making several amendments to the bill—most of which did not affect the cap-and-trade program—the committee reported the bill on June 5, 2009 ( H.Rept. 111-137 , Part I). The House of Representatives passed H.R. 2454 on June 26, 2009. The version summarized in Table 1 reflects the bill as passed by the House.
On September 30, 2009, Senators Kerry and Boxer introduced S. 1733 , which was referred to the Senate Committee on Environment and Public Works. The committee held hearings on the bill starting October 27, 2009, and markup of the bill began November 3. On November 5, the committee approved Senator Boxer's "Manager's Amendment" as a substitute, and ordered S. 1733 reported. The version summarized Table 2 reflects the bill as amended by the Manager's Amendment released by Senator Boxer on October 30, 2009.