Market News

 May 12, 2010
Details emerge on the American Power Act

 The long-awaited US climate bill ("the American Power Act") is set to be formally unveiled today by its key proponents in the U.S. Senate (Senators John Kerry and Joseph Lieberman) , with a last ditch effort the Obama administration urging quick passage of the controversial legislation this year.

At the heart of the new bill is a binding commitment to cut US carbon emissions by 17 per cent on 2005 levels by 2020, supported by an emissions trading scheme to be launched in 2013, initially to cover power firms, but ultimately to be expanded to cover other carbon intensive industries.

Based on a summary of the final version that began circulating late last night, there are no major surprises in the proposed legislation.

Off Shore Drilling

Reacting to growing anger over the still unchecked oil spill in the Gulf of Mexico, the draft legislation gives states the authority to block oil production within 75 miles of their shores and would give coastal states 37.5 percent of the revenue derived from offshore drilling. However the bill sets the stage for a major expansion of off shore drilling, seen by many as one way to garner support from a handful of moderate Republicans who will be needed to pass the bill.

Another element in the draft legislation that will help secure Republican support are new loan guarantees ($54 billion) for nuclear power and direct federal funding for clean coal projects.

Carbon Trading

The Senate bill established a cap-and-trade program for utility companies starting in 2013, under which the government would be able to issue a declining number of pollution allowances, each representing one metric tonne of carbon dioxide that companies could buy and sell.

Factories and other "industrial sources" would fall under the carbon market created by this cap-and-trade program after 2016. The bill contains provisions that would enforce maximum and minimum prices for pollution allowances. The floor price would be $12 per allowance and the ceiling would be $25 in 2013.

Carbon prices would be allowed to rise annually at a fixed rate, initially at 3 percent over inflation as measured by the Consumer Price Index, with a ceiling at 5 percent annually. In the event of unusually high carbon prices, a strategic reserve would be established to ensure the availability of "price-certain allowances."

This carbon market would be tightly regulated to ensure that trading of greenhouse gas instruments are conducted and cleared through a controlled carbon clearing organization that would regulate carbon market participants and ensure full compliance with transparent rules of conduct.

One of the hookers in the draft legislation is a requirement for states to abandon cap-and-trade programs they operate in favour of a national program that uses different pollution-control approaches for different industries. The implications for the future of carbon trading schemes such as the Western Climate Initiative, which includes a number of Canadian provinces, are unclear.

Consumer Protection

The Senate Bill contains several measures designed to protect consumers from energy prices hikes as the nation moves toward less polluting, but potentially more expensive forms of energy. Low income working families would be eligible for assistance in this regard.

Beginning in Beginning in 2013 and annually through 2029, allowances will be provided to local electricity distribution companies for the benefit of retail ratepayers, allowances that cannot be used to support electricity sales to individuals or entities other than those ratepayers.

Improving transportation

Major incentives will be provided to shift the U.S. transportation sector toward lower carbon alternatives. The transportation sector, like utilities and factories, will be included in the national carbon pollution cap, but will not participate in the proposed carbon market.

$7 billion annually is to be earmarked to improve mass transit and highways and new government investments in battery and other clean vehicle technologies are to be provided.

Major tax incentives are to be provided to encourage heavy-duty trucks to convert from petroleum to cleaner natural gas as a fuel. As well, impediments limiting natural gas generation by power plants will be removed.

State and local governmental entities will be allowed to issue tax credit bonds in order to finance natural gas vehicle projects, up to a national limit of $3 billion

International climate change provisions

The draft legislation calls for active participation by the United States in various international arenas with the goal to "establish binding agreements committing all major-emitting countries to contribute equitably to the reduction of global greenhouse gas emissions."

However, powers and provisions for financial rebates are to be put in place to protect domestic industries disadvantaged by the requirement to comply with U.S. regulations in the face of competition from industries in other countries with less stringent emission reduction requirements.

What implications this might have for Canada is unclear at the moment, but once the full bill is available, this should become more apparent.

In addition to providing assistance to the most vulnerable developing countries to protect and promote the interests of the United States, the bill would require an annual report on the climate change and energy polices of the top five largest greenhouse gas emitting countries that are not members of the Organization for Economic Co-Operation and Development.

This report would provide Congress and the American public with a better understanding of the actions these countries are taking to reduce greenhouse gas emissions and to "identify how the United States can assist these countries in achieving these reductions."

Clean Energy Career Development

One interesting aspect of the massive draft legislation are provisions to promote education and career development for emerging jobs in the clean and renewable energy sectors and for employment in areas related to energy efficiency, climate change mitigation, and climate change adaptation.

Doubts remain about passage

The full draft bill will be available later today for review. Political sources quoted in the U.S. media remain doubtful that the legislation will be passed this year and suggest the Obama Administration may not be able to negotiate a binding international emissions reduction regime backed by the full weight of Congress.

For more information on the draft bill visit here