Senate Climate Change Legislation Released Amid Uncertain Prospects

May 8, 2010
Client Alert Newsletter May 2010

On May 12, after months of negotiations and some false starts, Senators John Kerry and Joe Lieberman finally unveiled climate change legislation, called the American Power Act, that they hoped would garner enough votes to clear the U.S. Senate. Recent events, however, have raised additional doubts as to whether this "compromise" legislation will be passed by the Senate in 2010. By the beginning of April, negotiations with industry representatives and other senators on key points of the bill had progressed well enough that the three original drivers behind the bill—Senators Kerry, Lieberman and Lindsey Graham—had announced that they would unveil the new bill on April 26. On April 24, however, Senator Graham abruptly withdrew his support for the bill citing the Democrats' efforts to push immigration reform legislation ahead of the climate and energy bill. Senator Graham's withdrawal forced the cancellation of the April 26 announcement, while Senators Kerry and Lieberman worked to bring Senator Graham back to the table. Senator Harry Reid has since announced that immigration reform legislation is on hold for now, but Graham has not yet announced his support for the bill and has publicly expressed doubts as to whether the bill could pass.

In addition, the BP oil spill in the Gulf of Mexico raises additional obstacles for the bill. It was originally expected that the bill would contain provisions allowing for the expansion of offshore drilling to entice moderate Republicans to support the bill. In the wake of the oil spill, however, three prominent Democrat coastal Senators, Senators Menendez and Lautenberg from New Jersey and Senator Nelson from Florida, announced that they would oppose any bill that expands offshore drilling. While the American Power Act continues to include incentives for offshore drilling, the drafters added provisions that allow individual states to prohibit offshore drilling within 75 miles of their coastlines. Senator Nelson has recently indicated that these provisions satisfy his concerns.

Other provisions of the 987 page discussion draft are consistent with what has been reported over the past few weeks. The bill is designed to reduce greenhouse gas ("GHG") emissions to 20 percent below 2005 levels by 2020 and 80 percent below by 2050 primarily through a cap and trade mechanism. The bill sets a price floor for allowances of $5 per ton and a ceiling of $25 per ton, both of which increase at rates keyed to inflation. Utilities would not be subject to the program until 2013 with other industries not subject until 2016. Oil and gas companies would also be required to purchase allowances, but outside of the carbon trading market in an effort to reduce volatility in that industry. The bill also precludes EPA and state regulation of GHG emissions so long as industries subject to the cap are meeting the required reductions. In addition, the bill includes a number of incentives for construction of new nuclear power plants and the deployment of carbon capture and storage technology for coal fired power plants. Finally, the draft legislation includes provisions that would prohibit EPA from regulating GHGs under various provisions of the Clean Air Act, and at the same time prohibit individual states from enforcing their own cap and trade programs (e.g., the Regional Greenhouse Gas Initiative, commonly referred to as "RGGI").