As of May 22, 2009, the bill (The American Clean Energy and Security Act of 2009 — HR 2454) was approved in a House committee after considerable “policymaking” efforts. The bill was passed in a 33-to-25 vote and lays the groundwork for a greenhouse gas cap-and-trade system.

Despite the rhetoric against a cap-and-trade system, this is not the first U.S. federal cap-and-trade system. Gases such as SOx and NOx (also declared air pollutants) are covered by a cap-and-trade system that has been in place since the early 1990s.

The key elements of the House bill are:

A “small segment” of businesses, including utilities, factories and refineries (those that produce gasoline and other fuels), would be required to buy allowances.

A reduction in greenhouse gasses by 17 percent compared with 2005 levels by the year 2020, and by 83 percent by 2050, would be required.

Electrical utilities would be required to generate 15 percent of their electricity from renewables by 2020 (watch the ongoing battle to define “renewables”).

A “floor price” of $10 per ton would prevent the price of carbon allowance permits from sinking too low, and a ceiling price of $28 per ton (during the first year) would be established. If the cost per ton went above $28, more allowances would be “released” to the market.

Most of the allowances would be distributed (given away free) as opposed to auctioned off (this is the greatest criticism from some environmental groups).

The “free” allowances would be distributed to: electric power companies; regulated electric utilities or local distribution companies; merchant coal and independent generators with long-term power contracts;
regulated natural gas distribution companies (beginning in 2016) and to home heating and propane consumers.

Now the fun begins. The bill was referred to eight other committees, including the Ways & Means Committee and the Agriculture Committee. The Ways & Means Committee will “consider” tariffs to protect U.S. goods competing with those from countries lacking regulations on greenhouse gas emissions (read: India and China). The Agriculture Committee will of course examine “incentives” for biofuels such as ethanol.

With regards to the battle for what are renewables, the definition was expanded to include certain hydro, biogas, biofuels, coal mine methane and waste-to-energy projects.

Those in Favor and Those Against

So who likes this “imperfect” bill?

Apparently the White House supports the bill, although it is weaker than what was initially advocated (100 percent auctioning of allowances versus 85 percent “free”).

Greenpeace withdrew its support, but the Environmental Defense Fund (EDF) supports the bill. EDF does not believe that the strength of the bill was impacted by the change in auctioning versus free allowances.

One of the more interesting supporters was AFL-CIO President John Sweeney. His comments are provided below:

“America’s workers commend Chairman Henry Waxman and the members of the House Energy and Commerce Committee for their leadership on the crucial issues of addressing climate change, investing in green technologies and creating jobs. Passing The American Clean Energy and Security Act out of committee was an important step forward, and as currently marked up, it makes significant, job-creating investments, while attempting to minimize impacts on existing workers.

Addressing the issues of climate change and energy policy is of immense importance. We must do it properly to prevent harmful effects on America’s workers.”

The Bottom Line

The bill will go through several changes in House Committee, and who knows what this will look like when it gets thru the Senate.

It is clear that there is no time to waste in quantifying your carbon footprint both “within your fence line” and within your supply chain. In addition, carbon labeling of products may actually be gaining some traction. One of the amendments, which was approved by the House Energy & Commerce Committee “appears” to lay the groundwork for a carbon labeling program for all products sold in the United States. The amendment, proposed by Rep. Tammy Baldwin (D-WI), requires that the EPA administrator conduct a study to “determine the feasibility of establishing a national program for measuring, reporting, publicly disclosing, and labeling products or materials sold in the United States for their carbon content…”

What impact carbon legislation might have on your business (operations and brand value) is the key question. Evaluating this potential impact (and opportunity) is smart risk management for any business.

Some background, and how this latest move “fits” within the quickly evolving U.S. policy:
On April 2, 2007, in Massachusetts v. EPA, 549 U.S. 497 (2007), the Supreme Court found that greenhouse gases are air pollutants covered by the Clean Air Act. The Court ruled that the U.S. EPA Administrator must determine “whether or not emissions of greenhouse gases from new motor vehicles cause or contribute to air pollution which may reasonably be anticipated to endanger public health or welfare, or whether the science is too uncertain to make a reasoned decision.”

With this decision, “the U.S. EPA Administrator is required to follow the language of section 202(a) of the Clean Air Act. The Supreme Court decision resulted from a petition for rule making under section 202(a) filed by more than a dozen environmental, renewable energy, and other organizations.”

As a follow-up to this earlier decision, the U.S. EPA Administrator signed a proposal with the two findings:
“The Administrator is proposing to find that the current and projected concentrations of the mix of six key greenhouse gases—carbon dioxide (CO2), methane (CH4), nitrous oxide (N2O), hydrofluorocarbons (HFCs), perfluorocarbons (PFCs), and sulfur hexafluoride (SF6)—in the atmosphere threaten the public health and welfare of current and future generations. This is referred to as the endangerment finding.”

“The Administrator is further proposing to find that the combined emissions of CO2, CH4, N2O, and HFCs from new motor vehicles and motor vehicle engines contribute to the atmospheric concentrations of these key greenhouse gases and hence to the threat of climate change. This is referred to as the cause or contribute finding.”

While this is a significant development (and was expected) it does not necessarily mean that greenhouse gases will be regulated under the Clean Air Act.

Before the EPA can officially adopt the ruling or take any regulatory actions, the proposed ruling – based on a peer-reviewed scientific analysis of: carbon dioxide, methane, nitrous oxide, hydrofluorocarbons, perfluorocarbons and sulfur hexafluoride – must undergo a 60-day public comment period.

This move by the U.S. EPA is playing out while Congress also moves forward to develop a plan to regulate carbon. Congressional hearings are scheduled to begin this week.

The draft House bill, “American Clean Energy and Security Act of 2009” authored by Rep. Henry Waxman (Chairman of the Energy and Commerce Committee) and Rep. Edward Markey (Chairman of the Energy and Environment subcommittee) is significantly shaping the debate as to what a federal climate program looks like. This is essentially the current competition with the U.S. EPA.

Key elements of the draft bill are:
- “A national renewable electricity mandate where utilities need to get 6 percent of power from solar, wind, biomass, or geothermal sources in 2012 and 25 percent in 2025. One-fifth of the requirement can be met with energy-efficiency measures.

- A demonstration facility for carbon capture and sequestration where carbon dioxide from coal-burning power plants is stored underground.

- Giving authority to the Federal Electricity Regulatory Commission for planning power grid modernization with smart-grid technology and upgrades to the transmission lines.

- A single federal fuel-efficiency standard and low-carbon fuel standard for biofuels.

- An “energy efficiency resource standard” to create incentives for electricity and natural gas companies to invest in customer efficiency programs.

- A global warming reduction program modeled on recommendations from U.S. Climate Action Partnership (www.us-cap.org) which is a coalition of large corporations and NGOs advocating regulation. The target is a 20 percent reduction of greenhouse gas emissions below 2005 levels in 2020, 42 percent reduction in 2030, and 83 percent cut in 2050.

- Programs to promote “green jobs,” such as training, and rebates for heavily polluting industries that could be put at a competitive disadvantage from costs related to carbon regulations.”

It appears that the preference is for congressional action to regulate carbon and not U.S. EPA under the Clean Air Act. Congress is now in a race with the. EPA.

Bear in mind that we are also looking at the U.S. becoming engaged in upcoming negotiations in Copenhagen during early December 2009. It is unlikely that the US will go into these negotiations with a final congressional bill or U.S. EPA regulations in place. There needs to be “room to negotiate” during Copenhagen. As we move forward on a federal program to regulate greenhouse gases a clearer message as to what the program will look like will wait just a bit longer until later this year.

In the midst of all of this, U.S. companies need to determine their carbon footprint (including their supply chain and products) and explore the various regulatory scenarios and how they will impact their business (including potentially new products and services).

This is now a classic risk management exercise.

For further reading on the endangerment assessment, visit http://epa.gov/climatechange/endangerment.html.