Greenhouse Gas Reduction: Cap-and-Trade Bills in the 110th Congress
Released: 2008-06-27T00:00:00

Introduction

Climate change is generally viewed as a global issue, but proposed responses generally require action at the national level. In 1992, the United States ratified the United Nations Framework Convention on Climate Change (UNFCCC), which called on industrialized countries to take the lead in reducing the six primary greenhouse gases to 1990 levels by the year 2000. For more than a decade, a variety of voluntary and regulatory actions have been proposed or undertaken in the United States, including monitoring of power plant carbon dioxide emissions, improved appliance efficiency, and incentives for developing renewable energy sources. However, carbon dioxide emissions have continued to increase.

In 2001, President George W. Bush rejected the Kyoto Protocol, which called for legally binding commitments by developed countries to reduce their greenhouse gas emissions. He also rejected the concept of mandatory emissions reductions. Since then, the Administration has focused U.S. climate change policy on voluntary initiatives to reduce the growth in greenhouse gas emissions. In contrast, in 2005, the Senate passed a Sense of the Senate resolution on climate change declaring that Congress should enact legislation establishing a mandatory, market-based program to slow, stop, and reverse the growth of greenhouse gases at a rate and in a manner that "will not significantly harm the United States economy" and "will encourage comparable action" by other nations.

A number of congressional proposals to advance programs designed to reduce greenhouse gases have been introduced in the 110 th Congress. These have generally followed one of three tracks. The first is to improve the monitoring of greenhouse gas emissions to provide a basis for research and development and for any potential future reduction scheme. The second is to enact a market-oriented greenhouse gas reduction program along the lines of the trading provisions of the current acid rain reduction program established by the 1990 Clean Air Act Amendments. The third is to enact energy and related programs that would have the added effect of reducing greenhouse gases ; an example would be a requirement that electricity producers generate a portion of their electricity from renewable resources (a renewable portfolio standard). This report focuses on the second category of bills. (For a review of additional climate change related bills, see CRS Report RL34067, Climate Change Legislation in the 110 th Congress , by [author name scrubbed] and [author name scrubbed].)

Proposed Legislation in 110th Congress

In the 110 th Congress, Members have introduced 12 bills that include provisions to impose or permit some form of market-based controls on emissions of greenhouse gases. General descriptions of those bills follow, beginning with S. 2191 , which was reported, with amendments, on May 20, 2008, by the Senate Committee on Environment and Public Works. The major provisions of the seven Senate bills are compared in Appendix A . The major provisions of the five House bills are compared in Appendix B .

S. 2191 , as introduced October 18, 2007, by Senators Lieberman and Warner, would cap greenhouse gas emissions from the electric generation, industrial, and transportation sectors (for facilities that emit more than 10,000 metric tons of carbon dioxide equivalent—mtCO2e). As introduced, the cap is estimated by the sponsors to reduce emissions to 15% below 2005 levels in 2020, declining steadily to 63% below 2005 levels in 2050. The program would be implemented through an expansive allowance trading program to maximize opportunities for cost-effective reductions. Credits obtained from increases in carbon sequestration and acquisition of allowances from foreign sources could be used to comply with 30% of allowance requirements. The bill would also establish a Carbon Market Efficiency Board to observe the allowance market and implement cost-relief measures if necessary. (For recent action on S. 2191 and for modifications to the provisions, see the next section.)

S. 3036 , introduced by Senator Boxer on May 20, 2008, is identical to the reported version of S. 2191 , except that S. 3036 contains a budget amendment aimed at making the bill revenue-neutral. This would entail devoting a percentage of auction revenues—increasing from 6.1% in 2012 to 15.99% in 2031 and thereafter—to offset budget deficits that are projected to occur due to the cap-and-trade program. This bill was considered by the Senate the week of June 2, 2008.

S. 280 , introduced January 12, 2007, by Senator Lieberman, would cap emissions of the six greenhouse gases specified in the United Nations Framework Convention on Climate Change at reduced levels from the electric generation, transportation, industrial, and commercial sectors—sectors that account for about 85% of U.S. greenhouse gas emissions. The reductions would be implemented in four phases, with an emissions cap in 2012 based on the affected facilities' 2004 emissions (for an entity that has a single unit that emits more than 10,000 metric tons of carbon dioxide equivalent); the cap steadily declines until it is equal to one-third of the facilities' 2004 levels. The program would be implemented through an expansive allowance trading program to maximize opportunities for cost-effective reductions, and credits obtained from increases in carbon sequestration, reductions from non-covered sources, and acquisition of allowances from foreign sources could be used to comply with 30% of reduction requirements. The bill also contains an extensive new infrastructure to encourage innovation and new technologies.

S. 309 , introduced January 16, 2007, by Senator Sanders, would cap greenhouse gas emissions on an economy-wide basis beginning in 2010. Beginning in 2020, the country's emissions would be capped at their 1990 levels, and then proceed to decline steadily until they were reduced to 20% of their 1990 levels in the year 2050. EPA has the discretion to employ a market-based allowance trading program or any combination of cost-effective emission reduction strategies. The bill also includes new mandatory greenhouse gas emission standards for vehicles and new powerplants, along with a new energy efficiency performance standard. The bill would establish a renewable portfolio standard (RPS) and a new low-carbon generation requirement and trading program.

S. 317 , introduced January 17, 2007, by Senator Feinstein, would cap greenhouse gas emissions from electric generators over 25 megawatts. Beginning in 2011, affected generators would be capped at their 2006 levels, declining to 2001 levels by 2015. After that, the emission cap would decline 1% annually until 2020, when the rate of decline would increase to 1.5%. The allowance trading program includes an allocation scheme that provides for an increasing percentage of all allowances to be auctioned, with 100% auctioning in 2036 and thereafter. The cap-and-trade program allows some of an entity's reduction requirement to be meet with credits obtained from foreign sources and a variety of other activities specified in the bill.

S. 485 , introduced February 1, 2007, by Senator Kerry, would cap greenhouse gas emissions on an economy-wide basis beginning in 2010. Beginning in 2020, the country's emissions would be capped at their 1990 levels. After 2020, emissions economy-wide would be reduced 2.5% annually from their previous year's level until 2031, when that percentage would increase to 3.5% through 2050. The allowance trading system includes an allocation scheme that requires an unspecified percentage of allowances to be auctioned. The bill also includes new mandatory greenhouse gas emission standards for vehicles, along with a new energy efficiency performance standard. The bill would establish a renewable portfolio standard (RPS), increase biofuel mandates under the Renewable Fuels Standard, and mandate new infrastructure for biofuels. Finally, the bill expands and extends existing tax incentives for alternative fuels and advanced technology vehicles, and establishes a manufacturer tax credit for advanced technology vehicle investment.

S. 1766 , introduced July 11, 2007, by Senator Bingaman, would set emissions targets on most of the country's greenhouse gas emissions. Greenhouse gas emitting activities such as methane emissions from landfills, coal mines, animal waste, and municipal wastewater projects, along with nitrous oxide emissions from agricultural soil management, wastewater treatment, and manure management, are not included under the targets, although credits for use by covered entities are available or may be generated by verified GHG reductions in these areas. Beginning in 2012, covered entities would have emissions targets set at their 2006 levels in 2020. The emissions targets would decline steadily until 2030 when the emission target would be set at the entities' 1990 levels. Compliance can be secured either through an allowance trading program or by paying a safety valve price (called a Technology Accelerator Payment or TAP). Under the trading program, allowances are allocated according to various categories, including covered entities; eligible facilities, such as coal mines and carbon-intensive industries; states; and sequestration activities. Initially, 24% of all allowances are auctioned, a percentage that increases over time. The TAP is set at $12 a metric ton of carbon dioxide equivalent; it increases 5% annually above the rate of inflation. The bill also requires countries that do not take comparable action to control emissions to submit special allowances (or their foreign equivalent) to accompany exports to the United States of any covered greenhouse intensive goods and primary products.

H.R. 620 , introduced February 7, 2007, by Representative Olver, is a substantially modified version of S. 280 . Using the same basic structure as S. 280 , the emission caps under H.R. 620 are more stringent. Reductions from affected sectors (electric generation, transportation, industrial, and commercial) would be set at 2004 levels in 2012 and then steadily decline until the cap is equal to about one-fourth of facilities' 2004 levels. Although H.R. 620 permits affected entities to comply with the reduction requirements with credits from foreign sources, sequestration, and reductions from non-covered entities, these credits are limited to 15% of the source's reduction requirement.

H.R. 1590 , introduced March 20, 2007, by Representative Waxman, is similar to S. 485 . H.R. 1590 would cap greenhouse gas emissions on an economy-wide basis beginning in 2010. Beginning in 2020, the country's emissions would be capped at their 1990 levels. After 2020, emissions economy-wide would be reduced by roughly 5% annually from their previous year's level through 2050, when emissions levels would be capped at 80% below 1990 levels. The allowance trading system includes an allocation scheme that requires an unspecified percentage of allowances to be auctioned. The bill also includes new mandatory greenhouse gas emission standards for vehicles, along with a new energy efficiency performance standard. The bill would also establish a renewable portfolio standard.

H.R. 4226 , introduced November 15, 2007, by Representative Gilchrest, is a modified version of H.R. 620 . Using the same basic structure as H.R. 620 , emission limitations are based on percentages of 2006 emission levels. Reductions from affected sectors (electric generation, transportation, industrial, and commercial) would be set at 2006 levels in 2012 and then steadily decline until the cap is equal to about one-fourth of facilities' 2006 levels in 2050. The bill provides that the President may establish a program to require importers to pay the value of GHGs emitted during the production of goods or services imported into the United States from countries that have no comparable emission restrictions to those of the United States. The program's requirement may not be imposed on countries until negotiations to achieve agreement on such restrictions have been attempted. In addition, the bill also establishes a Carbon Market Efficiency Board to observe the allowance market and implement cost-relief measures if necessary.

H.R. 6186 , introduced June 4, 2008, by Representative Markey, would cap emissions from covered sources at 930 million mtCO2e in 2050. Of the long-term reduction targets in the cap-and-trade bills, this is among the most stringent. H.R. 6186 would auction 94% of its emission allowances in 2012, increasing to 100% by FY2020. Almost 60% of the auction revenues would be distributed (via tax credits and rebates) to low- and middle-income households. The bill would direct EPA to develop emission performance standards for non-covered entities, which may include coal mines, landfills, wastewater treatment operations, and animal feeding operations. In addition, new (as defined in the bill) coal-fired power plants would be required to capture and geologically sequester not less than 85% of their CO2 emissions within a specified time frame.

H.R. 6316 , introduced June 19, 2008, by Representative Doggett, would cap emissions from covered sources at 348 million mtCO2e in 2050. Of the long-term reduction targets in the cap-and-trade bills, this is the most stringent. In addition, the bill would direct EPA to develop regulations that prevent growth in emissions from non-covered entities. H.R. 6316 would auction 85% of its emission allowances in 2012, increasing to 100% by FY2020. Approximately 54% of the auction revenues would be distributed for consumer assistance: of this allotment, 66% would fund a healthcare coverage program (established by subsequent legislation); the remainder would provide rebates and tax relief to low- and moderate-income households. Domestic offsets and international allowances could combine to contribute up to 25% of covered source's allowance requirements. Similar to other bills, a Carbon Market Efficiency Board would observe the allowance market and implement cost-relief measures if necessary. The bill would also require countries that do not take comparable action to control emissions to submit special allowances (or their foreign equivalent) to accompany exports to the United States of any covered primary product.

Legislative Action in the 110th Congress

On May 20, 2008, the Senate Committee on Environment and Public Works' Subcommittee on Private Sector and Consumer Solutions to Global Warming and Wildlife Protection reported out a revised version of S. 2191 . As reported from subcommittee, S. 2191 is estimated to reduce greenhouse gas emissions 19% below 2005 levels by 2020 (up from 15% as introduced) and 63% below 2005 levels by 2050. The increase in the estimated reductions in 2020 is the result of amended text that includes greenhouse gases from all natural gas uses under the overall emissions cap. Other amendments approved included modifications to eligibility requirements for the advanced technology vehicles manufacturing incentive program and the advanced coal generation technology demonstration program. Modifications were also made to the proposed allocation of allowances to help tribal communities respond to climate change and to encourage international forest carbon activities, along with 1% of allowances reserved for rural cooperatives and a corresponding reduction in allowances allocated to the rest of the electric power industry. The revised bill also added two new recipients of auction revenues: a Bureau of Land Management Emergency Firefighting Fund ($300 million) and a Forest Service Emergency Firefighting Fund ($800 million).

On December 5, 2007, the full committee ordered reported out a revised version of S. 2191 by an 11 to 8 vote. The bill was reported by the committee on May 20, 2008 ( S.Rept. 110-337 ). The revised bill expands the greenhouse gas reduction program coverage by replacing the previous definition of covered facility based on the electric power, transportation, and industrial sectors with a comprehensive upstream definition for oil refineries, natural gas processing plants, and a downstream definition for coal consumers. Among the amendments agreed to by the full committee were a new low carbon fuel standard (LCFS) that would require the carbon intensity of transportation fuel to be frozen in 2011 and then reduced by 5% in 2015 and 10% in 2020. Other amendments agreed to would increase incentives for states to modify their utility regulatory structures to encourage energy efficiency, and would broaden the ability of states to use their allowance allocations to mitigate adverse economic impacts resulting from the bill's implementation. As ordered reported, S. 2191 's emissions cap is estimated by its sponsors to require a 71% reduction from 2005 levels by 2050 from covered entities (estimated by the sponsors to account for 87% of total U.S. greenhouse gas emissions). Overall, the sponsors estimate that S. 2191 would reduce total U.S. greenhouse gas emissions by up to 66% from 2005 levels by 2050.

In April 2008, a proposed amendment to S. 2191 was submitted by the committee to the Congressional Budget Office (CBO) to be included in the scoring of the bill. The amendment would provide for some of the auctioned revenues to be put aside for deficit reduction purposes.

Senator Boxer introduced S. 3036 on May 20, 2008. This proposal combined the reported version of S. 2191 with the revenue-neutral amendment. The Senate considered S. 3036 the week of June 2, 2008. On June 6, 2008, a motion to invoke cloture failed on a roll call vote of 48 to 36, and bill supporters withdrew the bill from consideration.

Appendix A. Comparison of Key Provisions of Senate Greenhouse Gas Reduction Bills

Appendix B. Comparison of Key Provisions of House Greenhouse Gas Reduction Bills

Appendix C. Common Terms

Allocation schemes (upstream and downstream). Regulatory approaches to allocating allowances (as opposed to auction schemes) can choose different points and participants along the production process to assign allowances and the resulting compliance responsibility. Upstream allocation schemes establish emission caps and assign allowances at a production, importation, or distribution point of products that will eventually produce greenhouse emissions further down the production process. For example, in the natural gas sector, emission caps could be established and allowances assigned at processing facilities where facilities and participants shrink from about 400,000 wells and 8,000 companies to 500 facilities and 200 companies. In contrast, downstream allocation schemes establish emission caps and assign allowances at the point in the process where the emissions are emitted. In the case of the natural gas industry, to achieve the same coverage as the upstream scheme, this would involve assigning allowances to natural gas-fired electric generators, industry, and even residential users. Thus, some downstream proposals choose either to exempt certain sectors (such as residential use) from a cap-and-trade program or to employ a hybrid allocation scheme where some of the allowances are allocated upstream and others downstream (such as the electric generators).

Allowance. An allowance is generally defined as a limited authorization by the government to emit 1 ton of pollutant. In the case of greenhouse gases, an allowance generally refers to a metric ton of carbon dioxide equivalent. Although used generically, an allowance is technically different from a credit . A credit represents a ton of pollutant that an entity has reduced in excess of its legal requirement. However, the terms tend to be used interchangeably, along with others, such as permits .

Auctions. Auctions can be used in market-based pollution control schemes in several different ways. For example, Title IV of the 1990 Clean Air Act Amendments uses an annual auction to ensure the liquidity of the credit trading program. For this purpose, a small percentage of the credits permitted under the program are auctioned annually, with the proceeds returned to the entities that would have otherwise received them. Private parties are also allowed to participate. A second possibility is to use an auction to raise revenues for a related (or unrelated) program. For example, the Regional Greenhouse Gas Initiative (RGGI) is exploring an auction to implement its public benefit program to assist consumers or pursue strategic energy purposes. A third possibility is to use auctions as a means of allocating some, or all, of the allowances established under a GHG control program. Obviously, the impact that an auction would have on cost would depend on how extensively it was used in any GHG control program, and to what purpose the revenues were expended.

Banking. Although allowances are generally allocated on an annual basis, most cap-and-trade programs do not require participants to either use the allowance that year or else lose it. Under many proposals, allowances can be banked by the receiving participant (or traded to another participant who can use or bank it) to be used or traded in a future year. Banking reduces the absolute cost of compliance by making annual emission caps flexible over time. The limited ability to shift the reduction requirement across time allows affected entities to better accommodate corporate planning for capital turnover, allow for technological progress, control equipment construction schedules, and respond to transient events such as weather and economic shocks.

Bubble. A bubble is a regulatory device that permits two or more sources of pollutants to be treated as one for the purposes of emission compliance.

Cap-and-trade program. A cap-and-trade program is based on two premises. First, a set amount of pollutant emitted by human activities can be assimilated by the ecological system without undue harm. Thus, the goal of the cap-and-trade program is to impose a ceiling (i.e., an emissions cap) on the total emissions of that pollutant at a level below the assimilative capacity. Second, a market in pollution licenses (i.e., allowances) between polluters is the most cost-effective means of reducing emissions to the level of the cap. This market in allowances is designed so that owners of allowances can trade those allowances with other emitters who need them or retain (bank) them for future use or sale. In the case of the sulfur dioxide program contained in the 1990 Clean Air Act Amendments, most allowances were allocated free by the federal government to utilities according to statutory formulas related to a given facility's historic fuel use and emissions; other allowances have been reserved by the government for periodic auctions to ensure market liquidity.

Carbon tax. A carbon tax is generally conceived as a levy on natural gas, petroleum, and coal according to their carbon content, in the approximate ratio of 0.6 to 0.8 to 1, respectively. However, proposals have been made to impose the tax downstream of the production process when the carbon dioxide is actually released to the atmosphere. In contrast to a cap-and-trade program, in which the quantity of emissions is limited and the price is determined by an allowance marketplace, with a carbon tax, the price is limited and the quantity of emissions is determined by the participants based on the cost of control versus the cost of the tax.

Coverage . Coverage is the breadth of economic sectors covered by a particular greenhouse gas reduction program, as well as the breadth of covered entities within a covered sector.

Emissions cap. A mandated limit on how much pollutant (or greenhouse gases) an affected entity can release to the atmosphere. Caps can be either an absolute cap , where the amount is specified in terms of tons of emissions on an annual basis, or a rate-based cap , where the amount of emissions produced per unit of output (such as electricity) is specified but not the absolute amount released. Caps may be imposed on an entity, sector, or economy-wide basis.

Generation performance standard (GPS). Also called an output-based allocation , allowances are allocated gratis to entities in proportion to their relative share of total electricity generation in a recent year.

Grandfathering. Grandfathering generally refers an allocation scheme in which allowances are distributed to affected entities on the basis of historic emissions. These allowances are generally distributed free-of-charge by the government to the affected entities. Grandfathering can also refer to entities that because of age or because they have met an earlier standard, or other factors, are exempted from a new regulatory requirement.

Greenhouse gases. The six gases recognized under the United Nations Framework Convention on Climate Change are carbon dioxide (CO 2 ), methane (CH 4 ) nitrous oxide (N 2 O), sulfur hexafluoride (SF 6 ), hydrofluorocarbons (HFC), and perfluorocarbons (PFC).

Hybrid Program. Generally a greenhouse gas reduction program that allows emitters to choose between complying with the reduction requirement of a cap-and-trade program or paying a set price (safety valve price) to the government in lieu of making reductions.

Leakage. Decreases in greenhouse gas-related reductions or benefits outside the boundaries set for defining a project's or program's net greenhouse gas impact resulting from mitigation activities. For example, emissions could be reduced in an area with greenhouse gas controls by moving an emitting industry to an area without such controls.

" No regrets " policy. A "no regrets" policy is one of establishing programs for other purposes that would have concomitant greenhouse gas reductions. Therefore, only those policies that reduce greenhouse gas emissions at no additional cost are considered.

Offsets. Offsets generally refer to emission credits achieved by activities not directly related to the emissions of an affected source. Examples of offsets would include forestry and agricultural activities that absorb carbon dioxide, and reduction achieved by entities that are not regulated by a greenhouse gas reduction program.

Revenue recycling . Some greenhouse gas reduction programs create revenues through auctions, compliance penalties, or imposition of a carbon tax. Revenue recycling refers to how a program disposes of those revenues. How a program handles revenues received can have a significant effect on the overall cost of the program to the economy.

Safety valve. Devices designed to prevent or to respond to unacceptably high compliance costs for greenhouse gas reductions. Generally triggered by prices in the allowance markets, safety valve approaches can include (1) a set price alternative to making reductions or buying allowances at the market price, (2) a slowdown in tightening the emissions cap, and (3) lengthening of the time allowed for compliance. Depending on the interplay between the emissions cap and safety valve and actual compliance costs, a safety valve can affect the integrity of the emissions cap.

Sequestration. Sequestration is the process of capturing carbon dioxide from emission streams or from the atmosphere and then storing it in such a way as to prevent its release to the atmosphere.