CLIMATE:

Senators prepare for autumn battles on emissions limits, allocations, offsets

John Kerry and Barbara Boxer have spoken. Now, the other 98 senators have their turn.

On issues from emissions targets and allowances to price collars and offsets, Kerry (D-Mass.) and Boxer (D-Calif.) are certain to be pulled in every direction as the delicate negotiations begin on the 821-page climate bill the lawmakers unveiled yesterday.

The path to the 60-vote goal in the Senate is expected to move through six committees and, ultimately, Majority Leader Harry Reid's office.

Reid (D-Nev.) acknowledged yesterday that passing legislation aimed at curbing greenhouse gas emissions and reducing U.S. dependence on foreign oil will be a tough climb.

"It won't be an easy task to develop a bill that achieves these goals in a cost-effective way that can garner the 60 votes likely needed for passage, but I believe that we can succeed by working in a bipartisan manner," he said.

Reid added that he hoped to work with Democratic committee leaders, "open-minded Republicans and the White House to move a bill to the floor as soon as possible."

Senate Majority Whip Dick Durbin (D-Ill.) was circumspect about the prospects for the climate bill making it to the floor this year. "We are not ruling it out," he said, quickly adding that health care remains "front and center" for Democratic leaders and the Obama administration.

For his part, Kerry was optimistic the upcoming negotiations with swing vote Democrats and Republicans would at some point lead to Senate passage.

"I can see a road from here to there," Kerry said. "I mean, three months ago nobody believed we'd be talking about this seriously, but we are and we have a lot of people at the table who want to try to get this across the line, even though they have issues.

"So if people approach it in good faith, I think we can get something done," Kerry added. "If people are determined just to block and stop, I still believe we can get something done because I think we can build a critical mass here."

As they push for votes, Senate Democratic leaders are looking toward several small working groups that are dealing with key issues, and concerns of moderate and conservative lawmakers. For example, Sen. Joe Lieberman (I-Conn.), a longtime supporter of climate legislation, said he is working on language dealing with nuclear power and coal that includes Sens. Lindsey Graham (R-S.C.) and John McCain (R-Ariz.).

Of the Kerry-Boxer bill, Lieberman said, "They've started a process today and I thank them for that. I think they would agree that their bill as it's laid down today can't get 60 votes and so I'm going to do whatever I can with a lot of others."

Several critical swing votes standing in the way of 60 votes were candid about the difficult negotiations ahead.

Sen. Robert Byrd (D-W.Va.) thanked the sponsors for adopting some of his ideas on carbon capture and storage. But he added, "While this is an encouraging sign, we have a long way to go on this legislation. Many issues have yet to be addressed. There is still a tough road ahead."

Maine Republican Sen. Olympia Snowe, who has largely been silent on the climate debate as she focuses on health care, issued a statement yesterday reminding all of her work cosponsoring past bills with Kerry dating back to 2003.

"I believe it is imperative that we end energy paralysis and confront this monumental 21st century challenge," Snowe said. "At the same time, it is imperative any legislation incorporates the well-being of our economy as a foremost priority -- especially given unemployment rates nationally are approaching 10 percent."

At the same time, a cross section of GOP senators sounded the alarm that the Kerry-Boxer proposal was headed in the wrong direction. "These are fancy, complicated words for high-cost energy that will send jobs overseas looking for cheap energy," said Sen. Lamar Alexander (R-Tenn.), a member of the EPW Committee who in years past has supported cap-and-trade legislation on power plants alone.

The following is a breakdown of how the Kerry-Boxer bill deals with several of the high-profile issues at the center of the cap-and-trade debate, as well as how it compares to the House-passed bill, H.R. 2454.

Emission limits

Kerry and Boxer turned left on the question of what limit to set for greenhouse gas emissions in 2020, the target date that is considered the most important given the near-term signal it sends to business as it plans upcoming investments in large new infrastructure.

The Democrats went with a 20 percent limit based on 2005 levels, a more aggressive approach than both the House-passed bill's 17 percent target and President Obama's call for a 14 percent cut.

Kerry defended the 20 percent limit, pointing to the 6 percent drop that has already occurred this year due to the economic recession. "So we are effectively saying we've got to go another 14 percent," he told reporters yesterday. "So this is not a reach. And I think people need to take a breath and step back and look at the facts before they start making judgments."

Moving forward, the 20 percent target promises to be a starting point in the negotiations. From their right, Kerry and Boxer must deal with a number of their own moderate caucus members -- including Sens. Max Baucus (D-Mont.) and Jay Rockefeller (D-W.Va.) -- who would have preferred moving to an even less aggressive target than the House bill.

"Requiring 20 percent emission reductions by 2020 is unrealistic and harmful," Rockefeller said. "It is simply not enough time to deploy the carbon capture and storage and energy efficiency technologies we need. Period."

Senate Republicans also pounced on the change. "It is to the left of Speaker [Nancy] Pelosi and to the left of the president," argued Sen. Mike Johanns (R-Neb.).

Off Capitol Hill, several industry groups questioned the Senate Democrats' move toward a more aggressive emissions limit.

"We are concerned that this bill is a major step backward from the House version of the bill as it will put even greater pressure on energy-intensive, trade-sensitive industries such as the steel industry," said Thomas Gibson, president and CEO of the American Iron and Steel Institute.

Charles Drevna, president of the National Petrochemical & Refiners Association, said the Senate bill "goes even further in seeking more unrealistic reductions that will impose onerous regulatory burdens on domestic refiners amidst fierce global competition and increased costs on the driving public, farmers and truckers."

And the Edison Electric Institute issued a statement saying it would prefer "reasonable emissions targets and timetables that reflect technology availability."

In the other direction, liberal Democrats and their allies in the environmental community are seeking upward of a 40 percent cut by 2020.

Sen. Bernie Sanders (I-Vt.) said during a Capitol Hill rally that he would push to increase the near-term targets, a sentiment echoed by Greenpeace USA and Friends of the Earth.

"Science demands at least a 40 percent reduction in emissions, compared to 1990, by 2020," said Friends of the Earth President Erich Pica. The Senate bill, Pica added, is "nowhere near what a fair U.S. contribution to a global emissions reductions should be to avert climate catastrophe."

As for Kerry, he signaled yesterday that the 20 percent limit in the draft bill may not be the final product.

"We'll see what we can hold on to, we'll see where the will of the Senate is," Kerry said. "That's what legislating is about, I'm perfectly happy to accept the will of the Senate. But I also want to do so based on facts. And the facts are, this is imminently achievable at no cost, even a payback, to many companies."

Allocations

Kerry and Boxer punted in their draft on one of the most contentious battles ahead in the climate bill: allocation of emission allowances. The Democrats did not release all of the details on how they would divide up potentially hundreds of billions of dollars in credits that industries would need to turn in for compliance with the cap-and-trade program.

At the same time, they did preview a few highlights of where they want the allowance debate to go.

For starters, the Senate bill calls for an auction of 25 percent of the emission allocations every year between 2012 and 2050, with the proceeds dedicated to the Treasury to keep the bill deficit neutral.

That approach departs from both Obama and the House-passed legislation.

In his fiscal 2010 budget, Obama called for a 100 percent auction of allowances, but he compromised during the House debate to help secure votes from moderate and conservative Democrats. In all, the House bill would auction off 15 percent of the allowances around 2011, with the proceeds directed toward low- and moderate-income families.

Senate Democratic aides said that Kerry and Boxer started writing their bill with the deficit-neutral piece in mind because of the importance of the "score" from the Congressional Budget Office. It also may be useful in a debate with fiscal conservatives, including Sens. Judd Gregg (R-N.H.) and Bob Corker (R-Tenn.), who have argued that last year's Senate climate bill cost too much.

"The bill does not add one penny to the deficit," Boxer said yesterday. "We're very excited about that."

But Sen. Lisa Murkowski (R-Alaska), the ranking member of the Energy and Natural Resources Committee, questioned the need for a 25 percent auction "which, of course," she said, "is going to drive the cost up for energy significantly higher."

As for the other allocation figures, the Kerry-Boxer bill does not give specific numbers. Still, it does offer a structure for how certain industries will get their allowances, including investor-owned electric utilities, merchant coal generators, rural electric cooperatives, municipal power and petroleum refiners.

For example, it would follow the House proposal by sending allocations for power companies to state-regulated local electric-distribution companies (LDCs), which are instructed to use any revenue to protect consumers from electricity price increases. All of the utility-sector allowances would be distributed 50-50 between companies based on their historic emission levels and retail sales.

The bill is blank on the question of how many allowances would go to the LDCs. In the House bill, Democrats sent 35 percent to the power companies. EEI yesterday urged the Senate to include 40 percent of the allocations for the electric utility industry, with the "vast majority" going to the LDCs "for the direct benefit of their customers, under the strict supervision of state public utility commissions."

EEI also urged "a gradual transition from allowance allocations to a full auction."

Other trade groups also weighed in on the allocation issue.

At the National Association of Regulatory Utility Commissioners, spokesman Rob Thormeyer urged the Senate to nix any allocations for merchant generators "because it can, and, if the [European Union] experience has taught us anything, it will-lead to windfall profits with no corresponding consumer benefits."

Thornmeyer linked the prospect of free allowances for merchant generators to a separate section requiring EPA and the Federal Energy Regulatory Commission to establish rules to counter potential windfall profits after they discover they are happening.

"This of course begs the question: Why not just remove any doubt about windfall profits by not allocating to merchant coal in the first place?" he asked.

The House bill set aside 5 percent of the allocations for free to merchant generators.

Murkowski found fault with Kerry-Boxer for even suggesting a 50-50 split between retail sales and emissions. "It will be a massive transfer of wealth outside, from the Midwest to the East and West coast," she said. "And so it's going to create huge, I think, regional disparities and how the costs are distributed under this."

Other interest groups used yesterday's bill unveiling as a platform to make their own case for a share of the allocations.

The American Gas Association urged the Senate to increase allowances to natural gas utilities from the House-passed bill's 9 percent level up to 12 percent. The group also asked lawmakers to extend the phase out of free allocations from the House bill's 2030 date until 2040, while either changing or deleting a provision that mandates one-third of that allowance value must be used for energy efficiency programs (see related story).

The Solar Energy Industries Association said it hoped the Senate would follow the House's lead and dedicate 10 percent of the allowances to states for renewable energy and energy efficiency, with deployment funds for both distributed generation and for utility-scale renewables projects.

And Trout Unlimited urged the Senate Finance Committee, which is expected to play a major role in the allocation debate, to set aside 5 percent of the allowances to fund natural resource adaptation. On that issue, the House bill directs 2 percent of the allowances from 2012 through 2021 toward domestic adaptation efforts, increasing to 4 percent between 2022 and 2026 and to 8 percent in 2027 and beyond. Half of the House allowances would go toward wildlife and natural resource protection, while the other half are directed to other areas, such as public health.

Baucus yesterday said he planned to release allocation language on the climate bill once he hears from Reid about the timing of the legislation. Kerry, meanwhile, played down the prospect of a turf war between Boxer's EPW Committee and the Finance Committee.

"I think it's healthy to have a good effort getting everyone invested in this," Kerry said. "In the end, all six committees of jurisdiction are going to be melded just like the health care bill. I think every committee needs to put its own thinking on the table. It's helpful."

Boxer said she would release allocation language in the coming weeks as part of her chairman's mark.

Cost containment

Kerry and Boxer built off the House-passed bill in dealing with the thorny question of how to curb higher energy costs associated with implementing a cap-and-trade program.

The sponsors opted for what they called a "soft price collar" that allows U.S. EPA to release allowances into the carbon market via an auction once permits hit a $28-per-ton level.

House Democrats set up a similar system, but the two bills differ in how that ceiling rises. The House bill's ceiling increases 5 percent per year plus inflation while the Senate measure would start with the same formula for its first five years and then increase after 2018 by 7 percent plus inflation.

To keep carbon prices from bottoming out, Kerry and Boxer opted for an $11 floor on carbon credits. That is a small increase compared with the House-passed $10 floor.

Boxer insisted that the price boundaries would send a useful signal for lawmakers concerned about wild price swings in the carbon market. "That really puts a real marker down that we're not going to stand for manipulation and speculation," she said.

But swing vote senators did not sound so convinced.

Sen. Byron Dorgan (D-N.D.) said his skepticism of a future U.S. carbon market is proven by "the fact of the very existence of the need for a price collar."

And Murkowski, who last year supported climate legislation with an absolute ceiling, or "safety valve," on the price of carbon credits, added, "We must determine how to balance environmental progress with economic growth. Our economy is already struggling. Now is not the time to enact a bill that imposes financial burdens, the extent of which we don't know for sure."

EEI also has been vocal on the cost containment issue. But the trade group did not touch any of the specifics in the Senate draft yesterday, saying only that it wants "an effective price collar with a moderate floor and ceiling on allowance prices to contain costs, and reduce volatility and concerns about potential market manipulation."

Offsets

Another provision designed to reduce the climate bill's costs entails an offset program that allows farmers and landowners to get paid for tree planting, sustainable farming practices and other environmentally friendly projects.

Here, the Senate and House bills both agree on allowing 2 billion tons of total annual offsets. But they differ in just how many offsets are available to polluters from inside and beyond the U.S. border.

The Senate plan states that three-fourths of the 2 billion tons of the annual offsets would come from domestic projects and one-fourth from international efforts. By contrast, the House bill divides them evenly, though it also stipulates that as many as 1.5 billion tons can come from international projects if the domestic supply falls short.

EPW Committee Democrats made the most noise about the need for more domestic offsets, citing complaints about the integrity of many overseas projects used in the 1997 Kyoto Protocol. But it is also unclear how polluters would ever come close to using up all of the domestic offsets. In its analysis of the House bill, EPA said the 1-billion-ton limit on U.S. offsets would never be reached, making access to international offsets all the more important if sponsors want to keep allowance prices down.

Kerry and Boxer are expecting to hear more recommendations on offsets from Agriculture Chairwoman Blanche Lincoln (D-Ark.) and Sen. Debbie Stabenow (D-Mich.), among others.

Stabenow has been working on the offset issue for several years but said yesterday she is focused for the moment on the health care debate. "We've got language, but I've not had a chance to sit down and plot out a timetable," she said.

Asked when she planned to release her offset proposal, Stabenow replied, "As soon as I can get Finance to get done with health care."

What Kerry and Boxer did put forward on offsets yesterday drew criticism from several quarters.

Murkowski questioned the entire offset concept, as well as the potential that the system would lead to price increases on energy. "Nobody can quantify exactly how we're supposed to benefit from all of this," she said. "You know, we're told that there are going to be offsets and the ag community is told that this could be good for them. But all we know is that everything is going to go up."

At Friends of the Earth, Pica said the Senate Democrats should not allow 2 billion tons per year of offsets in the first place, saying that total "seriously undermines the integrity of the already weak emissions cap and delays the health, environmental and economic benefits of shifting to a low-carbon economy."

Kerry and Boxer also heeded a request from coal-state Senate Democrats, including Byrd and Sen. Arlen Specter (D-Pa.), to exempt fugitive emissions from coal mines, landfills, oil and gas distribution facilities and allow these projects to be eligible for the offset market.

In the House-passed bill, those projects do not fit into the offset criteria but still must meet new greenhouse gas technology standards.

National Farmers Union President Roger Johnson questioned why the Agriculture Department did not get control and administration of the offset program. The Senate bill leaves that decision to the president, while the House bill sided with USDA over EPA.

Johnson said he also wants greater recognition for "early actor" farmers and landowners who have already taken steps to sequester carbon, and he does not want an "artificial cap" on domestic offsets.

"The language unveiled today fails to address the unique role agriculture can play," Johnson said.

Reporters Alex Kaplun, Robin Bravender, Katherine Ling and Ben Geman contributed.

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