CLIMATE:

Kerry-Lieberman bill uses 'fewer buckets' in giving out highly prized allowances

The Senate climate and energy bill unveiled Wednesday takes a fresh stab at how to distribute hundreds of billions of dollars in emission allowances among carbon-heavy industries and a variety of other highly touted interests.

Sens. John Kerry (D-Mass.) and Joe Lieberman (I-Conn.) claim their legislation's approach is the most efficient effort yet at slicing and dicing up who gets the valuable credits, no easy task given competing demands from everyone from power companies to Big Oil, highway builders, environmentalists and religious leaders.

"We're trying to minimize the package," Kerry said yesterday of the 987-page bill. "We're trying to keep it simple. We're trying to keep it transparent and open and understandable for why something took place."

Closed-door negotiations over the next few weeks -- under the direction of the original authors, the White House and Senate Majority Leader Harry Reid (D-Nev.) -- are likely to spawn changes to the overall formula if the proposal has any chance of notching the magic 60 votes needed to break an expected GOP-led filibuster.

"Certainly throughout the bill there's going to be wheeling and dealing," said Ted Gayer, the co-director of economic studies at the Brookings Institution and author of a first-blush analysis pinpointing the Senate bill's allowance formula.

In their opening bid, Kerry and Lieberman opted to auction off at least 25 percent of the emission allowances in the program's early years, with the rest going for free to a wide range of different entities, from electricity local distribution companies to trade-exposed energy intensive industries and research into carbon capture and storage technologies.

Several sources studying the new legislation said they were still trying to nail down an exact figure of how many of the allowances are auctioned off when compared to the credits that are being given away for free. The uncertainty stems from several sections of the bill that suggest auctioning, but no explicit requirements.

Other sections of the bill are also vague in pinpointing exactly when the auctions should begin, except for a call to distribute allowances for free until a certain total dollar value has been reached. That amount won't be known until the carbon market starts operating and a clear price signal is in place.

Come 2035, however, there is no debate that the Kerry-Lieberman bill shifts to a full 100 percent auction of emission allowances, with the revenue directed completely back to consumers. That is a similar approach to the House-passed climate bill (H.R. 2454).

But when it comes to distributing the emission credits over the next several decades, the Kerry-Lieberman proposal diverges in many ways from the House legislation and a counterpart bill (S. 1733) that passed last fall out of the Senate Environment and Public Works Committee. Gone, for example, are the EPW Committee Democrats' "member requested priorities" that Chairwoman Barbara Boxer (D-Calif.) included on everything from agriculture to forestry, renewables and international adaptation (E&E Daily, Oct. 26, 2009).

The Kerry-Lieberman bill also splits up the major economic sectors into different emission requirements, a key move to satisfy some of the nation's oil companies. And they have also narrowed down the number of pots that are direct recipients of allowances, while placing some credits in established entities like the Highway Trust Fund.

"There's fewer buckets," said John Larsen, a senior associate at the World Resources Institute's climate and energy program. "There are clearer categories of recipients. I think it relies more on some existing funding infrastructure that people are familiar with. That's somewhat of a departure from other proposals."

Firm dollar figures to reflect the value of the allowances are difficult to gauge.

Senate staff use a rough measurement that 1 percent of the allowances equal between $600 million and $1 billion, with the amount growing in later years of the climate program as the carbon permit prices rise in tandem with stronger emission targets. The aides warn that such amounts are only projections based on economic studies of earlier climate bills, rather than the numbers related to the specific Kerry-Lieberman proposal that will come out over the next few weeks and months from U.S. EPA, the Energy Information Administration and the Congressional Budget Office.

Here is how the Kerry-Lieberman bill divides the allowances among key industries through 2029, after which all of them must purchase credits via an auction:

  • The local distribution companies, or LDCs, that service electric utilities get the largest share of allowances in the early years of the climate program. From 2013 until 2015, the LDCs get 51 percent of the overall climate program's credits for free. The amount slowly phases down to 35 percent from 2016 to 2025, 32 percent in 2026, 24 percent in 2022, 16.5 percent in 2028 and 8.5 percent in 2029.
  • Natural gas local distribution companies get free allowances for their consumers and energy efficiency projects (9 percent) between 2016 and 2025. The credits then slowly phase down to 7.2 percent in 2026, 5.4 percent in 2027, 3.6 percent in 2028 and 1.8 percent in 2029.
  • Merchant coal companies get 4 percent of the allowances for free from 2013 through 2015, dropping to 3.5 percent from 2016 to 2025, and then phasing out to 2.8 percent in 2026, 2.1 percent in 2027, 1.4 percent in 2028 and 0.7 percent in 2029.
  • Energy consumers using home heating oil and propane get 1.9 percent of the allowances from the start of the climate program in 2013 through 2015. The allowances drop to 1.5 percent between 2016 and 2025, 1.2 percent in 2026, 0.9 percent in 2027, 0.6 percent in 2028 and 0.3 percent in 2029.
  • Energy-intensive trade exposed industries get 2 percent of their allowances for free from 2013 to 2015, though they do not face their first emission limits until 2016. Kerry and Lieberman said the credits should help the industries transition to the carbon market. From 2016 through 2025, the industries get 15 percent of the allowances for free, dropping to 12 percent in 2026, 9 percent in 2027, 6 percent in 2028 and 3 percent in 2029.
  • To deal with the emissions that come from their direct operations, petroleum refiners get 4.3 percent of the allowances for free from 2013 to 2015. They get 3.8 percent of the allowances from 2016 to 2025, 3 percent in 2026, 2.3 percent in 2027, 1.5 percent in 2028 and 0.8 percent in 2029. Unlike the House bill, transportation emissions are regulated under a separate trading program, with the producers and importers of refined petroleum products kept out of the carbon market but still must purchase allowances at a fixed price from the allowance auction.

The Senate bill also uses allowances to promote the research, development and deployment of low-carbon energy and transportation technologies, in one case well into the 2030s.

  • Carbon capture and storage efforts, for example, would get a boost with 0.8 percent of the allowances from 2017 to 2019, growing to 4.5 percent in 2020, 5 percent in 2021, 7.4 percent from 2022 to 2025, 8 percent from 2026 to 2029 and 10 percent from 2030 to 2034.
  • Research and development directed to the battered U.S. auto and steel industries would get 2 percent of the allowances from 2013 to 2020 and then ending at 1 percent in 2021.
  • A broad range of additional energy research and development efforts would get 2 percent of the allowances from 2013 through 2021, stopping after that.
  • States would also get 2 percent of the free allowances from 2013 to 2018 to invest in renewables and energy efficiency, dropping to 1 percent in 2019 and 2020 and then ending at 0.5 percent in 2021.

The Senate bill also has several other allowance winners.

  • States with climate laws on the books or in the near-implementation phase, including programs in the Northeast and West, get 1 percent of the free allowances from 2013 to 2015 to compensate for losses in revenue due to their federal pre-emption.
  • Global and domestic adaptation efforts get 1.5 percent of the free allowances in 2019 and 2020. The figure rises to 2.2 percent in 2021, 3.2 percent from 2022 to 2025, 3.5 percent in 2026, 4 percent in 2027, 5 percent in 2028, 5.5 percent in 2029 and then 6 percent from 2030 to 2034.
  • The Highway Trust Fund, state and local transportation projects and a national grant program for highway improvements all get the following free allowances: 4 percent from 2013 to 2015, 3.1 percent in 2016, 2.7 percent in 2017 and 2018, 2.5 percent in 2019, 2 percent in 2020 and 2021, 1.9 percent from 2022 to 2029, and ending with 2.23 percent from 2030 to 2034.
  • Low-income Americans would get a steady flow of allowances every year of the program to help deal with higher energy bills. The total is 12.3 percent from 2013 to 2019, 10.6 percent from 2020 to 2029, 11.5 percent from 2030 to 2034 and then 15 percent from 2035 through 2050.
  • Allowances start accumulating in a new "universal refund program" dedicated to rebates for the public, starting in 2026 with 8.1 percent and growing to 21.5 percent in 2027, 33.7 percent in 2028, 47.1 percent in 2029, 54.5 percent from 2030 to 2034 and 74.5 percent from 2035 through 2050. The program itself does not start distributing the allowances until 2035 after a one-year study to determine the most efficient method for the times. While the debate currently centers around using the Earned Income Tax Credit or a direct rebate, Senate aides said they called for the study in about 25 years given the likelihood of new alternatives being invented.
  • Under Senate budget rules, the climate legislation also must be deficit-neutral through its lifetime. That means extra allowances -- projected between 5 and 7 percent per year from 2013 through 2050 -- will go into the Treasury.

Complaints ... and changes?

Supporters of the Kerry-Lieberman approach came from many corners during the bill's unveiling, starting with electric utility industry officials who pushed hard for a larger share of allowances when compared with the House bill.

Duke Energy Corp. CEO Jim Rogers said Wednesday that the allowances for the power companies can help the industry make the adjustments needed over the next several decades to a low-carbon economy. "What this bill does is help make that transition a reality," he said.

Kerry also touted the amount of money -- likely in the hundreds of billions of dollars -- that is headed back to the public over the course of the legislation's nearly four-decade lifetime.

"The theory is to try to maximize the refund to the American consumer," Kerry said. "That's the overriding principle. We want to hold the consumer as harmless as possible and get as much allocation through to the consumer. That's really what's guided this, and I think it's a very significant amount that's cushioning any impact on the consumer."

Some lawmakers and interest groups are already calling for changes.

Sen. Sherrod Brown (D-Ohio), a leading negotiator for industrial-state Democrats, said he would like to see several changes to help trade-exposed industries compete on the international level. He wants more allowances, a slower implementation timetable and no presidential discretion before the United States begins placing border adjustments on imported goods that come from developing nations without strict climate laws of their own.

"The bill needs to improve," Brown said. "I want to make sure there are incentives in this bill so we don't just delay responding to a developing country that doesn't do what it needs to do on environmental issues, because then the manufacturing jobs start to leave prematurely."

Defending Maine's role as an original member of the Northeastern Regional Greenhouse Gas Initiative, Sen. Olympia Snowe (R-Maine) said she wanted to see a larger share of allowances go to states that would see their climate programs killed by the Kerry-Lieberman bill. "My state has been rejected," she said. "You have to really make sure the people are going to be made whole, and I don't know if that's been made possible."

Twenty-three environmental and religious groups also issued a joint statement yesterday seeking more money for international climate efforts, both in terms of clean energy and adaptation.

"These investments are squarely in America's interest," wrote the League of Women Voters of the United States, the National Catholic Rural Life Conference, the National Hispanic Environmental Council, the National Wildlife Federation, Oxfam America and the World Wildlife Fund. "Without these investments, we will miss a critical opportunity to create new American jobs, help avert global instability, foster our national security, and mobilize the global climate action needed to solve a problem that is already affecting communities here in the U.S. and around the world."

Dan Lashof, a climate change expert with the Natural Resources Defense Council, said his group would be pushing for more allowances dedicated at the state level to energy efficiency, as well as a requirement that electric utilities spend a minimum portion of their allocations on projects that promote efficiency. That requirement exists for natural gas companies, but Lashof said he would like it extended to electric utilities too.

With all the demands, some observers doubt there will be enough allowances and refunds to go around.

"It's not clear the allocation math adds up," said Scott Segal, an attorney at Bracewell & Giuliani who represents the refining and electric utility industries. Looking at just one of the pots of allowances, Segal added, "It's not at all clear there's enough allocations for enough time to make a difference in shielding energy intensive industries from market distortion and international competition problems."

Karl Rove, the former top political adviser to President George W. Bush, said Tuesday that he too did not think the bill's focus on consumers would live up to expectations. "In that we're supposed to think that everybody makes out just fine and everybody is going to get exactly what they put in, no, this is going to be a tax of hundreds of billions on the American people, and for no good reason," Rove said on "FOX & Friends."

Kerry insisted that the math does add up, citing numerous requests he had to turn down for more allocations. "They're not there," he said. "They don't exist. If you're going to keep it simple and you're going to keep it small, it doesn't happen."