Weekly Climate Change Policy Update - June 22, 2009

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Commentary 

On the issue of climate policy, moderate “Blue Dog” Democrats apparently come in two breeds: fossil and farm.  Chairmen Waxman and Markey negotiated assiduously within the Energy and Commerce Committee to accommodate the concerns of Democrats from states heavily reliant on coal, natural gas, and petroleum.  However, having successfully reported a bill out of the Committee, which has a healthy contingent of moderates with fossil interests, they now find themselves confronted with a revolt of farm-state Democrats led by Agriculture Committee Chairman Collin Peterson (D-MN).  It appears that negotiations will continue through the week ahead, with a vote on ACES potentially arriving as early as Saturday, June 27th.  The two central issues under negotiation are: (1) the role of the U.S. Department of Agriculture (USDA) with respect to offset projects in the agricultural and forestry sectors; and (2) the allocation of allowances to rural electric cooperatives . . . State Department Climate Envoy Todd Stern proposed that China agree to a "peak" emissions year even though China appears not ready to commit to an absolute cap on emissions …The Senate Energy and Natural Resources Committee reported an energy bill with some Republican support, but expect further action by the full Senate on the renewable electricity standard, drilling, and nuclear power.

Executive Branch

• Administrator Jackson Outlines Timeline for New Vehicle Standards.  Environmental Protection Agency (EPA) Administrator Lisa Jackson stated at a press conference that the agency could be ready to propose new vehicle greenhouse gas (GHG) emission standards under Section 202 of the Clean Air Act by August of this year.  These new standards would be of comparable stringency to state-level GHG emission standards for which California has sought an EPA waiver since 2005.  Pursuant to a landmark agreement announced May 19th between states, automakers, and the federal government, the standards would also be coordinated with fuel economy standards to be issued by the National Highway Traffic Safety Administration.  According to Jackson, the new vehicle standards would probably precede a final agency determination on whether GHGs endanger public health and welfare.  Since such a finding is a prerequisite to issuing vehicle emission standards under the Act, Jackson stated that the proposed emission standards would only become effective if and when the endangerment finding – which was proposed April 17th – becomes final.
• EPA Willing to Share Offset Responsibility With USDA.  Addressing concerns expressed by Congressmen from agricultural states in connection with the American Clean Energy and Security Act (ACES), EPA Administrator Lisa Jackson said that there “needs to be an important relationship” between the USDA and EPA in the administration of “offset” projects in the agricultural and forestry sectors.  Offset projects are projects that reduce or sequester emissions in uncapped sectors of the economy.  Jackson said that USDA “has offices across the country and good relationships with the agricultural community,” and would be well positioned to provide information and education about offset programs to sponsors of carbon reduction projects.  However, Jackson stopped short of agreeing that USDA should assume full responsibility for agricultural offset programs. 
• Executive Branch Personnel Changes.
  • Cathy Zoi was confirmed last week by the Senate as Assistant Secretary of Energy for Energy Efficiency and Renewable Energy.
  • Walter Lukken, a Republican member of the five-person Commodity Futures Trading Commission (CFTC), resigned to take up a position with the New York Stock Exchange.  Under climate legislation being considered in the House, the CFTC is a leading contender to obtain oversight of markets for derivative contracts based on GHG allowances. 

Congress

• Pelosi, Waxman Close on Votes for ACES.  Or not.  Negotiations continued between Rep. Henry Waxman (D-CA), Chairman of the Energy and Commerce Committee and sponsor of ACES, and Democrats with reservations about the clean energy and cap-and-trade bill.  Carol Browner, White House coordinator for energy and climate policy, has also joined the negotiations.  The loudest criticisms have come from Rep. Collin Peterson (D-MN), Chairman of the Agriculture Committee, who argues that the bill should do more to ensure a sufficient role for agricultural and forestry “offsets” and should give USDA regulatory control over those projects.  Rep. Peterson is also contending that the free emission allowance distribution to utilities is unfair to the Midwest because it is based on both historic emission levels and retail sales, disadvantaging coal-reliant areas.  Perhaps signaling the difficulty of lining up fence-sitting Democrats, House Speaker Nancy Pelosi (D-CA) met with Republican lawmakers who have shown interest in addressing climate change.  Carbon Control News reported that Chairman Waxman’s staff are also drafting provisions to guide the planning and siting of electricity transmission lines; these provisions would be offered as an amendment to ACES when it is considered on the floor.  Although no firm date has been set for floor consideration of ACES, House leadership has indicated to Members that a vote could be scheduled as early as Saturday, June 27^th.
• Committee Approves Comprehensive Energy Bill.  The Senate Energy and Natural Resources Committee voted 15-8 to report comprehensive energy legislation, titled the American Clean Energy Leadership Act, to the Senate.  Democrats Mary Landrieu (LA) and Robert Menendez (NJ) voted against the measure, while Republicans Lisa Murkowski (AK), Sam Brownback (KS), Jeff Sessions (AL), and Bob Corker (TN) supported it.  Prior to voting on the bill, the Committee approved an amendment to require the Federal Energy Regulatory Commission (FERC) to develop a national interconnection standard for small generators (less than 20 MW) to facilitate the use of distributed energy generation as well as an amendment to support deployment of recharging infrastructure for electric vehicles.  On the floor, various Senators will be looking to strengthen the bill’s renewable electricity standard, remove a provision allowing oil and gas drilling closer to coastlines, and to provide greater support for nuclear energy development.
• Cash for Clunkers Passes House & Senate.  The House and the Senate passed legislation to give consumers up to $4,500 to trade in older vehicles in exchange for more fuel efficient models; the program was attached to a $106 billion supplemental funding bill that provides funds for the U.S. military in Pakistan, the wars in Iraq and Afghanistan, and other major issues such as preparations to fight the flu pandemic.
• Appropriations Bill Amendments Bind EPA.  The House Appropriations Committee reported out a $10.6 billion spending bill for EPA.  The bill includes amendments preventing the agency from requiring factory farms to report GHG emissions from manure management systems, or from requiring livestock farmers to obtain permits for GHGs emitted by livestock under any future Clean Air Act GHG regulations.  The Committee narrowly rejected an amendment that would have prohibited EPA from considering “indirect” GHG emissions from land-use changes triggered by the use of crops for biofuel production when calculating the GHG intensity of biofuels.
• New Payments-for-Reductions Bill Introduced.  Rep. Chellie Pingree (D-ME) introduced H.R. 2880, which gives USDA the authority to certify and pay small farmers and landowners for GHG emission reduction and sequestration activities that would not qualify as offsets under ACES.  The bill’s supporters would like to have it included in ACES when ACES goes to the floor.
• Clean Energy Manufacturing Bill Introduced.  Senator Sherrod Brown (D-OH) introduced a bill to establish a $30 billion revolving loan program to help auto-parts suppliers and other small- and mid-sized manufacturers expand or revamp their clean-energy operations and improve their energy efficiency. 
• Climate Hearings Continue.  Rep. Ed Markey (D-MA), Chairman of the Select Committee on Energy Independence and Global Warming, held a hearing on June 18^th on how climate change will impact agriculture and forestry.  Sen. Max Baucus, Chairman of the Senate Finance Committee, held a hearing on the tax implications of giving away valuable emission allowances for free, and whether those allowances should be taxed.

States and Cities   

• RGGI Allowance Prices Fall at June Auction.  Regional Greenhouse Gas Initiative (RGGI) 2009 allowances fell to $3.23 at the fourth quarterly auction on June 17th.   This price represents an 8.6% drop from the March auction price of $3.51.  RGGI also sold 2.17 million vintage 2012 allowances at $2.06. 

Industry and Non-Governmental Organizations

• Commission Formed to Combat Tropical Deforestation.  A group of former lawmakers, business leaders, and representatives of non-governmental organizations have formed the Commission on Climate and Tropical Forests to produce recommendations on how tropical deforestation and associated risks can be reduced.  The Commission will be chaired by John Podesta of the Center for American Progress and former Sen. Lincoln Chafee (R-RI), and includes: former Sen. Chuck Hagel (R-NE); American Electric Power CEO, Chairman, and President Michael Morris; Christián Samper, Director of the National Museum of Natural History; Gen. Gordon Sullivan, former chief of staff of the U.S. Army; and Mark Tercek, CEO of the Nature Conservancy.   
• Institutional Investors Call on SEC to Promulgate Climate Disclosure Rules.  In a letter to Securities and Exchange Commission (SEC) Chairman Mary Schapiro, the Investor Network on Climate Risk – an organization representing 41 institutional investors managing approximately $1.4 trillion in assets – urged the agency to require companies to disclose financial risks related to GHG emissions and climate change.  The organization criticized existing reporting practices as “ad hoc,” and recommended that SEC require use of the Global Reporting Initiative reporting protocol for disclosure of climate risks.  The letter stated, “Many of us have concluded that disclosure of the regulatory, physical and litigation risks from climate change is critical in understanding the value and security of our investments.”   The letter is available at www.incr.com. 
• NFU Opposes ACES Bill.  The National Farmers Union (NFU) announced its opposition to the current language of ACES, stating its desire to see an expanded role for USDA in administering agricultural offsets.  The NFU also called for the bill to explicitly give farmers the right to participate in multiple environmental crediting programs at once; to allow unlimited use of domestic offsets; and to expand the ability of offset sponsors to obtain “early action” credits for emission reduction projects undertaken before 2009.   
• Steel Industry Urges House to Offer More Allowances, Stronger Trade Protections.  Representatives of the steel industry appeared at a hearing of the House Steel Caucus to advocate for changes to ACES.  Tom Gibson, president of the American Iron and Steel Institute (AISI), said that the bill should provide a more accelerated implementation of a program allowing the President to require “international reserve allowances” to be submitted for GHG-intensive imports from countries lacking GHG regulations comparable to those in the United States.  In addition, AISI called for the phase-out of allowance allocations for trade-sensitive industries to be extended so that it coincides with the phase-out for other industry sectors, and urged Congress to strike a provision that would prevent trade-sensitive industry sectors from receiving greater allowance rebates if their average energy intensity increases over time. 

Studies and Reports

• CBO Releases ACES Cap-and Trade Cost Estimate.  The Congressional Budget Office released an estimate of costs U.S. households would face if the cap-and-trade program in ACES was enacted.  The report projects that households would on average face costs of $175 in 2020; households in the lowest income quintile would experience a net benefit of $40 while households in the highest income quintile would see a net cost of $245 in that year.  The estimates reflect costs due to higher prices and benefits gained from allowance distribution, and do not reflect the impacts of other portions of the legislation or benefits of any avoided climate change impacts due to the program.  The report is available at http://www.cbo.gov/ftpdocs/103xx/doc10327/06-19-CapAndTradeCosts.pdf.
• U.S. Climate Impacts Report Released.  The U.S. Global Change Research Program released a state of knowledge report on climate change impacts in the United States.  The report states that evidence of the anthropogenic warming of the climate is “unequivocal” and that related changes have been observed in the United States, including increases in average temperatures (including a 7º Fahrenheit increase in average winter temperatures over the Midwest and northern Great Plains over the past 30 years), increased frequency and intensity of heavy rainfalls, a rise in sea levels, and reduced snow and ice cover.  In addition to the continuation of these trends if emissions are not curbed, the report notes that likely future U.S. impacts include more intense hurricanes and drier conditions in the Southwest.  Problems with erosion, storm damages, flooding, and water management, as well as negative health impacts, are likely to result.  “The projected rapid rate and large amount of climate change over this century will challenge the ability of society and natural systems to adapt,” the report concludes.  The report is available at www.globalchange.gov/usimpacts.
• FERC Report Highlights GHG Mitigation Through Peak Demand Reduction.  A major report commissioned by FERC concluded that existing electricity demand reduction programs could, if extended to other states, reduce electric “peak load” by 9% by 2019.  Under an optimal scenario, in which dynamic pricing of electricity is mandatory and all consumers participate in advanced metering programs, peak demand would be reduced 19% by 2019 – representing almost 150 gigawatts (GW) of capacity.  Discussing the report, FERC Chairman Jon Wellinghoff observed that such reductions would have the effect of “significantly lowering costs to consumers and reducing greenhouse gas emissions."  The report is available at http://www.ferc.gov/legal/staff-reports/06-09-demand-response.pdf.
• Natural Gas Reserves Estimates Jump.  An assessment of U.S. natural gas reserves released by the Potential Gas Committee (PGC), a volunteer group of geologists, scientists, and industry officials affiliated with the Colorado School of Mines, estimates the reserves at 1,836 trillion cubic feet of technically recoverable gas.  The estimate is 39% higher than the PGC’s last estimate in 2006.  The revised estimates of available natural gas may significantly impact cost estimates of climate change regulation because natural gas is a relatively low-carbon fossil fuel and greater supply could support fuel switching for electric generation and reduce price volatility. 

International

• U.S. Climate Change Envoy Hopes China Will Slow, Then Reduce GHG Emissions.  Following last weeks bi-lateral talks between China and the United States, U.S. Climate Change Envoy Todd Stern revealed that U.S. negotiators had proposed that China set a peak year for its (GHG) emissions.  Under the proposal, leading up to that peak year, China would agree to slow the rate of growth of its GHG emissions without an absolute cap; following the peak year, China’s absolute emissions level would decline.  China has not yet agreed to either slow the rate of growth of or cap its emissions, and Stern has stated that he does not expect China to agree to a national cap at this time. 
• European Council Discusses Climate Mitigation and Adaptation Fund.  At the two-day European Council summit meeting attended by twenty-seven European heads of government, European leaders discussed what financial contribution the European Union might make to an international fund that would finance climate change mitigation and adaptation measures in developing countries.  However, the group did not commit to a specific funding level.  The European Union is expected to push for the creation of such a fund as part of the Copenhagen climate change talks in December. 
• U.N. Secretary-General Convenes Business Group to Consult on Climate Change.  The Energy and Climate Change Advisory Group met for the first time in New York this week.  U.N. Secretary General Ban Ki-Moon formed this group to facilitate consultation with the world’s biggest companies on climate issues. The group is chaired by Kandeh K. Yumkella, Director-General of the U.N. Industrial Development Organization.  Top executives from Edison International (United States), the New Energy and Technology Development Organization (Japan), Tata (India), Suntech Holdings (China), and ESKOM Holdings (South Africa), as well as former Costa Rican President Jose Figueres, have been invited to participate. 

Ari Holtzblatt and Marisa Swenson, Summer Associates at the firm, contributed to this Update.