TEXAS TRANSNATIONAL LAW QUARTERLY - Vinson & Elkins LLP

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TEXAS TRANSNATIONAL LAW QUARTERLY – June 2009The allocation to utilities is designed to coverapproximately 90 percent of the emissionsattributable to the fossil fuels they burn ordistribute. However, the financial benefit of theallowances must be passed through to ratepayers, and Sections 783 and 784 of the billprovide special protection for industrial ratepayers, permitting a pro rata share of suchbenefits based on energy use. During thistransition period, only approximately 15 percentof the annual pool of emissions allowances willbe auctioned by the government for the directbenefit of energy consumers. Revenues fromthese auctions will be used to provide tax creditsto low income consumers. After 2030, however,the great majority of emissions allowances areto be auctioned with the proceeds used toprovide tax refunds on a per capita basis to allU.S. households.Offset CreditsACESA contains several other provisions thatmay substantially reduce the cost of emissionsallowances for covered entities. Some of theseprovisions, however, may also dampen theincentive for covered entities to meet thenominal emissions reduction targets written intothe bill from domestic activities.Most importantly, for compliance purposes, acovered entity may substitute offset creditsderived from reducing CO2 emissions orsequestering CO2 (or other GHGs) in sectorsnot directly subject to emissions caps (e.g.,agricultural and forestry). Section 722(d)(1) ofthe bill authorizes up to two billion tons of CO2eoffset credits annually to meet the compliancerequirements of covered entities. This provisioninflates the nominal GHG emissions caps forcovered entities by up to 30 percent in the earlyyears (before 2020) and by an even largerproportion in later years (e.g., 36 percent in2030). One half of the available offset tonnagemay be satisfied by either domestically sourcedoffsets or international offsets. However, theEPA can increase the proportion of U.S.emissions that may be offset by internationalcredits by 50 percent (up to 1,500 million tons) ifenough low-priced domestic offsets areunavailable. 3Offset credits may be issued by both the EPAand the Department of Agriculture (DOA), withthe DOA responsible for offsets sourced fromdomestic agricultural and forestry activities. SeeTitle V below. The EPA is charged with drawingup an initial list of appropriate domestic offsetsand related validation procedures within oneyear and adopting final regulations for issuingoffsets within two years. Among other rewardsfor early action, the EPA must also issuedomestic offset credits to entities that reduce orsequester GHGs after 2009 under certainvoluntary “early action” programs. Eligibleprojects can only generate early action creditsfor emissions reductions through the date that isthree-years following the enactment of ACESA.These early offset credits also may beexchanged later for emissions allowances.In consultation with the State Department, theEPA would also issue U.S. offset credits derivedfrom projects in developing countries. Creditsmay be issued in exchange for pre-existingforeign credits granted pursuant to the CleanDevelopment Mechanism (CDM) or a successortreaty established by the 1992 UN FrameworkConvention on Climate Change (UNFCC). Theintegrity of CDM offsets must be assured bysafeguards that are at least as strict as those inthe bill, and all offsets generally must be verifiedby accredited third parties.In addition to using domestic and internationaloffset credits, a covered party may also satisfyits compliance obligation by using time-limited or“term offset credits” for projects that sequesterCO2 or reduce GHG emissions. However,entities using term offset credits are required topost financial security equal to the cost ofobtaining permanent credits or allowances toreplace the expired term offsets. The issuanceof term offset credits is discussed further underTitle V. 4Other Cost Containment MeasuresACESA also directs the EPA to create a“strategic” reserve of allowances equal toapproximately 2.5 billion tons of CO2e. Thisamount is roughly 2 percent of the totalallowance pool from 2012-2050. A portion ofthis reserve is to be auctioned quarterly,beginning in March 2012, at a minimum auctionprice of $28 (in 2009 dollars); the price is subjectto a 5 percent annual escalator in 2013 and2014. Thereafter, prices are set at60 percent above the rolling three-year averageof allowance prices reported by registeredcarbon trading facilities. Only covered entities- 15 -
TEXAS TRANSNATIONAL LAW QUARTERLY – June 2009are eligible to bid in these auctions and eligiblebidders may not buy allowances equal to morethan 20 percent of their most recent annualcompliance obligations. The EPA is also givenauthority to outsource strategic reserve auctionsto third parties.In addition, ACESA permits unlimited banking ofallowances for use in future compliance years.Allowances with a future “vintage” may also be“borrowed” without interest to satisfy anobligation for the immediately preceding year,thereby creating a rolling two year complianceperiod. A covered entity also may meet up to15 percent of its annual obligation by holdingallowances with vintages up to five years laterthan the compliance year, subject to an8 percent annual in-kind interest payment.Finally, ACESA permits a covered entity to holdan unlimited number of qualified internationalemissions allowances for compliance purposes.The use of foreign allowances is to beauthorized by the EPA, in consultation with theSecretary of State, if the allowances are issuedunder a GHG control program that imposes anabsolute tonnage limit and is at least as strict asACESA. This provision, along with the roleaccorded international offset credits, wouldmake the U.S. an integral part of the globalmarket for carbon rights.This market developed after the 1997 KyotoProtocol was adopted and is likely to beexpanded by any follow-on treaty to curb GHGemissions worldwide that emerges from theupcoming December 2009 meeting of theUNFCC’s signatories in Copenhagen.Supplemental Emissions ReductionsACESA sets aside a special tranche ofallowances for curbing global deforestation.Deforestation and other land use changes areresponsible for an estimated 20 percent ofannual global GHG emissions, and the sponsorsof the bill believe that mitigation of these trendsoutside the United States may be more costeffective ton-for-ton than many U.S. GHGreduction measures. The set-aside is equal to5 percent of the total U.S. allowance pool from2012-2025 and 2-to-3 percent of the poolthereafter. These allowances may be distributedby the EPA as funding in-kind to eligibledeveloping countries, international organiza-tions, and private or public groups to stemdeforestation. The goal is to achieve cumulativesupplemental GHG reductions of 720 milliontons of CO2e by 2020 and six billion tons by2025.The bill also grants the EPA broad authorityunder the CAA for drawing up emissionsstandards for uncapped stationary sources ofGHG that exceed 10,000 tons of CO2e annually(e.g., are below the proposed 25,000 tons/yearthreshold) and, in the aggregate, are responsiblefor at least 20 percent of the uncapped GHGemissions. Under new Section 811 of the CAA,the EPA would be required to bring theseuncapped sources under the agency’s newstandards over a 10-year period. Compliancecosts under a new standard are not to exceedthe costs that would be incurred if a regulatedentity had to obtain emissions allowances.Greenhouse Gas ReportingTo evaluate the program’s effectiveness and toprovide a factual basis for auditing compliance,Part B of Title VII establishes a new federalGHG registry. It is to be based on new quarterlyGHG emissions reports from all covered entitiesbeginning in March 2011.The EPA is also directed to obtain quarterlyreports from other entities that would be coveredby ACESA had they met the annual 25,000metric tons of CO2e threshold, so long as theyemit at least 10,000 metric tons of CO2e in anyyear. Emissions data is to be self-certified andfiled electronically. The EPA must publish allGHG emissions data on the internet subject tothe protection of certain confidential businessinformation.The GHG registry provisions in the bill aresimilar but not identical to the EPA’s proposedGHG registry rules released for public commentin March 2009. Thus, if the EPA’s GHGreporting rules are adopted prior to the passageof ACESA, it is possible that the Congress willdefer to the agency’s rules and delete any GHGregistry provisions from the cap-and tradeprovisions. On the other hand, to the extent thatany new law would cover a broader range ofparties than the agency’s reporting rules nowcontemplate (e.g., because uncapped sourcesemitting more than 10,000 tons of CO2eannually may be subject to future emissions- 16 -
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