Summary of American Clean Energy and Security Act

September 8, 2009
by TODD KANTORCZYK
Client Alert Newsletter September 2009

On June 26, 2009, the U.S. House of Representatives ("House") passed sweeping energy and climate change legislation, entitled the American Clean Energy and Security Act of 2009 (the "ACES Act"), by a vote of 219-212. The final version of the bill, which totaled over 1,400 pages, would affect virtually every industry in the U.S., ranging from energy producers to real estate developers. The following is a brief summary of the major provisions of the ACES Act.

The ACES Act passed by the House contains five separate titles that cover a wide range of energy and climate change issues. Title I, entitled "Clean Energy" includes a federal renewable portfolio standard ("RPS") that, starting in 2012, requires a certain percentage of all electricity sold by retail providers come from renewable sources such as wind, solar, geothermal, and landfill gas. The required percentages start at 6 percent in 2012 and gradually increase to 20 percent in 2020. A certain portion of the RPS could also be satisfied through energy efficiency measures. The remainder of Title I includes a number of provisions related to clean energy technologies including carbon capture and sequestration, new source performance standards for coal fired power plants, electric and other advanced technology vehicles, and the "Smart Grid."

Title II of the ACES Act, entitled "Energy Efficiency" contains a number of provisions that would mandate energy efficiency improvements across a number of industries. For example, Subtitle A would require the Secretary of Energy to establish national energy efficiency building codes for residential and commercial buildings designed to achieve increased reductions in energy use between 2014 and 2030. Each state would be required either to adopt these federal building codes or update its own building codes to meet or exceed the federal standards. States would have to demonstrate compliance with these codes, and states that fail to comply would not be eligible for various incentives provided by the ACES Act. In addition to the federal building code provisions, Title II includes provisions related to lighting and appliance energy efficiency, transportation efficiency, industrial energy efficiency, and various "green" mandates applicable to the U.S. Department of Housing and Urban Development.

Title IV of the ACES Act contains various provisions that are intended to provide assistance to transition the U.S. to a "clean energy economy." This assistance covers energy intensive industries, such as steel manufacturers, green jobs and worker transition, consumer assistance, and clean technology exports. There are also provisions that require the federal government to study and potentially implement strategies designed to adapt to climate change threats.

While the aforementioned provisions are all intended to affect climate change, the centerpiece of the ACES Act is the greenhouse gas ("GHG") cap-and-trade program contained within Titles III and V, and parts of Title IV, which is designed to reduce GHG emissions from covered sources to 3 percent below 2005 levels by 2012, 17 percent below 2005 levels by 2020, and 83 percent below 2005 levels by 2050. The program covers seven GHGs (carbon dioxide, methane, sulfur hexafluoride, nitrous oxide, hydrofluorocarbons, perfluorocarbons, and nitrogen trifluoride), and applies to stationary sources emitting more than 25,000 tons per year of GHGs (measured as carbon dioxide equivalents), including producers and importers of petroleum fuels, natural gas distributors, and other specific sources. Like other cap-and-trade programs, these entities will be required to obtain permits (called allowances) for each ton of GHG emitted or produced. These allowances may be purchased from the government or from a private party that possesses extra allowances, or they may be given away by the government for free. The amount of allowances available for all covered entities, however, is reduced over time, which reduces the amount of GHGs emitted and establishes a "price" for carbon through supply and demand mechanisms.

Most of the negotiations leading up to passage of the ACES Act in the House concerned the amount of allowances that the federal government would auction versus how many would be given away for free and which entities would receive the free allowances. The final version of the ACES Act gives away almost 80 percent of the available allowances through 2026, after which the amount of free allowances are gradually reduced through 2050. The majority of the free allowances would go to electric and natural gas utilities, which would be required to use the value of these allowances to reduce the impact of higher energy prices. In addition, specific "energy intensive and trade vulnerable" industries would receive a percentage of free allowances to allow continued competition with similar industries based in countries without GHG emissions restrictions. Also, many of the incentives in the ACES Act (e.g., for carbon capture and sequestration, energy efficiency, etc.) are in the form of free allowances that can be sold to entities subject to the cap-and-trade program.

Another important aspect of the ACES Act cap-and-trade program is the use of offsets. Offsets are measurable efforts to reduce GHG emissions from entities that are not subject to the cap-and-trade program and that are beyond "business as usual" activities. Under the ACES Act cap-and-trade program, covered entities can use a certain amount of offsets, generated both in the U.S. and in other countries, to satisfy their compliance obligations. One of the key issues with respect to offsets is what activities can qualify for use as an offset. In negotiations related to these offset provisions, representatives from agricultural states were able to include provisions that grant the U.S. Department of Agriculture authority over offsets associated with agriculture and forestry initiatives, while the U.S. Environmental Protection Agency retained authority over other types of offsets.

The ACES Act cap-and-trade program also includes a number of provisions relating to the oversight of the "carbon markets" (i.e., the markets for buying and selling allowances and offsets). In short, the Federal Energy Regulatory Commission is charged with regulating the cash market in allowances and offsets, while the Commodity Futures Trading Commission is responsible for any derivatives or futures markets.

The final version of the ACES Act also included a "border tariff" provision that essentially places a tariff on any goods imported from countries such as China, India, and Brazil, that do not impose similar GHG restrictions on their own industries. While the Obama administration has indicated that it is not in favor of such a provision, a number of Senators from industrial states have voiced support for the provision.

With respect to developing state and regional cap-and-trade programs, the ACES Act allows the adoption of more stringent regulations, but suspends state or regional trading programs between 2012 and 2017 to allow the federal program to develop.