Senators John Kerry (D-Mass.) and Joe Lieberman (I-Conn.) yesterday presented their new nearly 1000-page American Power Act designed to reduce greenhouse gas emissions by 83 percent by 2050. The bill, which has not yet been introduced and still contains bracketed or incomplete provisions, was announced at a press conference at which a number of business and environmental leaders spoke in support, including the heads of the Edison Electric Institute and Duke Energy. The White House released a statement yesterday strongly supporting the bill.

Absent from the press conference was Senator Lindsay Graham (R.-S.Car.), who helped develop the bill. Senator Graham recently indicated that there should be a “pause” in work on the bill given his concerns about whether Majority Leader Harry Reid (D-Nev.) might intend to push immigration legislation before the climate change bill.

Without bipartisan support, the prospects for the bill remain uncertain. It is not known when the bill will be introduced or what process will be used to consider the bill. The Senate Environment and Public Works Committee has already reported a cap-and-trade bill, and the Senate Energy Committee has already reported an energy bill. Speculation included the possibility that Majority Leader Reid, who has indicated that he will personally shepherd the bill, might bring the legislation directly to the floor. The House has already passed the Waxman-Markey cap-and-trade bill. If the Senate were to pass the Kerry-Lieberman bill, the next step would be to resolve the differences between the Senate and House bills in conference. Speculation also exists that, if the necessary votes cannot be secured for a cap-and-trade bill, Congress might proceed with an “energy-only” bill, such as the one reported by the Senate Energy Committee.

The heart of the bill is a cap-and-trade program for electric generation and industrial and manufacturing sources. A number of elements of the bill differ from the Waxman-Markey approach, including a one-year delay in commencement of the program from 2012 to 2013. For the electric sector, more free allowances are provided, particularly in the early years of the program, and allowances are allocated among utilities according to a formula that provides for 75 percent of the allowances to follow emissions and 25 percent to follow retail sales, as compared with the 50/50 split in Waxman-Markey. This increased allocation to emissions benefits utilities with higher emitting facilities in their portfolios.

For manufacturing, the cap-and-trade program is delayed until 2016, and interim transition assistance is provided from the sale of allowances. Protection is also provided for trade-exposed energy-intensive industries, including a tariff imposed on imports of manufactured goods from countries that have not taken action to limit greenhouse gas emissions.

The petroleum sector is also treated differently than under Waxman-Markey. Instead of participating directly in the cap-and-trade program, refineries will be required to purchase allowances from a separate pool that has been set aside for this sector. All refineries will pay the same price for allowances, which will be set at the carbon market price for auctioned allowances. Conservative groups have already targeted this allowance fee provision as a gasoline tax.

Another change from Waxman-Markey is a floor and ceiling price for allowances. The ceiling price is set at $25 per ton in 2013 in constant 2009 dollars, to be escalated annually by the inflation rate plus 5 percent beginning in 2014. A facility, however, can only purchase up to 15 percent of its allowances at this price; the remainder of its allowance needs must be purchased at the market price. The floor price is set at $12 per ton in 2013 in constant 2009 dollars, to be escalated annually by the inflation rate plus 3 percent beginning in 2014. The legislative text brackets the $12 figure, meaning the exact number is subject to change.

Offsets may be substituted for allowances for up to 2 billion tons of greenhouse gas emissions per year. Offsets may be obtained from domestic or international sources, except that international offsets can only provide up to 25 percent of an entity’s offset purchases and, after 2017, 1.25 international offsets are needed to satisfy one allowance need. The percentage of international offsets that an entity can use can be increased if there is a shortage of domestic offsets.

The bill is also substantially different from Waxman-Markey on how allowance proceeds are spent. An Energy Refund Program is provided to low-income consumers to mitigate the impact of higher energy prices. Beginning in 2026, a Universal Refund will begin to be phased in to offset higher electricity costs. In addition, allowance revenues will fund a Deficit Reduction Fund in the Treasury.

One issue that has generated controversy in previous cap-and-trade legislation is the extent to which such legislation would preempt other state and federal regulation of greenhouse gases. In this respect, the language of Kerry-Lieberman is much like the language of Waxman-Markey. Clean Air Act regulation is mostly preempted, although lawyers may argue about whether the language creates loopholes. Significantly, however, unlike Waxman-Markey, the language does not preempt the authority of EPA to establish new source performance standards to limit GHG emissions from existing coal-fueled electric generating units. State cap-and-trade programs are preempted—in Waxman-Markey, this preemption was for five years only; in Kerry-Lieberman, the preemption is indefinite. On the other hand, any other state regulation of greenhouse gases is preserved, including the authority of states to force companies to retire allowances. States with existing cap-and-trade programs are also compensated for lost revenues resulting from the termination of these programs. No other provisions of federal law are preempted, preserving the ability of advocates to seek reduction of greenhouse gases through tort lawsuits, the Endangered Species Act, the Clean Water Act, and other authorities.

The bill contains provisions that the coal industry will like and not like. Provisions similar to those in Waxman-Markey are provided to incent the development of carbon capture and storage, including a fee on electricity sales and the use of auction revenues. On the other hand, despite the cap-and-trade program for coal-fueled electric generation units, new units initially permitted after January 1, 2009 are subject to greenhouse gas performance standards. And perhaps most controversially, the bill has a “Merchant Generator Efficiency Incentive” provision that would provide allowances for up to 35 gigawatts of coal-fueled merchant electric generation to incent the retirement of these units or their switch to “less emissive” fuels, presumably natural gas. Additionally, the bill has a provision entitled Coal-Fueled Transition program designed to provide tax incentives and to implement regulatory measures to close existing coal-fueled electric generating stations or fuel-switch them to natural gas or, potentially, to make efficiency improvements to allow their continued operation of certain of these units at lower greenhouse gas emission levels.

The bill has a nuclear title, including tax incentives, expanded regulatory risk insurance, a $54 billion loan guarantee fund and an expedited licensing process. The provision was cheered by nuclear supporters, although many indicated that these provisions are necessary but not sufficient to support wide-scale deployment of nuclear power. For instance, John Rowe, chairman and CEO of Exelon Corp., was quoted as saying that the bill would not change his company’s “wait and see” approach on new nuclear power. According to Rowe, “We have to see gas prices and carbon prices actually get a bit higher before we would move.” Many environmentalists, however, condemned the nuclear title.

A closely watched provision of the bill concerns oil and gas development. The bill would expand offshore oil and gas development, but states in the path of a potential spill could veto development, even if the rigs are off the coasts of other states.

Finally, unlike Waxman-Markey, the bill does not contain a renewable energy standard, building efficiency standards and other energy provisions. Such provisions are contained in the energy legislation reported from the Senate Energy Committee and presumably could be merged into the Kerry-Lieberman bill at some point in the future.

Lawyers and lobbyists are now studying the text of the legislation.

For more information please contact Peter Glaser at 202-274-2998 or