Senators John McCain and Joseph I. Lieberman introduced the Climate Stewardship Act of 2003 (S. 139) in the U.S. Senate in 2003. S. 139 would establish regulations to limit U.S. emissions of greenhouse gases [63], primarily through a program of tradable emission allowances and related emissions reporting requirements. In October 2003, Senators McCain and Lieberman proposed an amended version of the bill, S.A. 2028, which included the first phase of emissions reductions beginning in 2010 as proposed in S. 139 but removed references to a second phase of reductions beginning in 2016. On October 30, 2003, the Senate voted 43-55 to reject the measure. In July 2004, the Senators submitted the bill as the Climate Stewardship Act of 2004 (S.A. 3546), intending it as an amendment to legislation on class action lawsuits (S. 2062); however, the proposed amendment was tabled. Senator McCain has stated his intention to continue resubmitting the Climate Stewardship Act until it is passed by the Senate.  In March 2004, Representative Wayne Gilchrest submitted a version of the same bill, also called the Climate Stewardship Act of 2004, in the U.S. House of Representatives (H.R. 4067). It was cosponsored by 70 other Representatives. The House bill is essentially the same as the most recent Senate version, S.A. 3546. H.R. 4067 has been referred to the House Science Committee and Energy and Commerce Committee. 

Overview 

The Climate Stewardship Act of 2004 [64] would establish a system of tradable allowances to reduce greenhouse gas emissions. The bill includes requirements for mandatory emissions reporting by covered entities and for voluntary reporting of emissions reduction activities by noncovered entities; a national greenhouse gas database and registry of reductions; and a research program on climate change and related activities. The emissions allowance program would apply to most greenhouse gas emissions sources, the exceptions being those in the residential sector and entities in all sectors whose annual emissions are less than a certain threshold. Entities not directly covered by the allowance program would nevertheless be affected by its impacts on energy prices and the economy as a whole, as well as by the program’s incentives to reward voluntary reductions of emissions. 

The bill defines the covered sectors for the emission allowance program as the commercial, industrial, electric power, and transportation sectors [65]. Covered entities in the commercial, industrial, and electricity sectors are those that emit, from any single facility, greenhouse gas emissions from stationary sources exceeding 10,000 metric tons carbon dioxide equivalent per year [66]. In effect, this threshold would exempt most entities in the agriculture and commercial sectors. All petroleum used for transportation within the United States would be covered, and refiners would be responsible for submitting allowances for emissions related to petroleum sold for transportation use. Producers and importers of hydrofluorocarbons, perfluorocarbons, and sulfur hexafluoride would be required to submit allowances for emissions associated with their products, subject to the 10,000 metric ton threshold. 

The bill provides for the exemption of emission sources if the EPA deems their measurement or estimation to be impractical. This exemption would most likely apply to a large share of U.S. nitrous oxide and methane emissions, because many of their sources are difficult or uneconomical to measure. 

Emission Allowance Program 

The market-driven system of emission allowances proposed in the Climate Stewardship Act of 2004 would control greenhouse gas emissions by creating a fixed number of tradable emission allowances each year. The EPA is charged with establishing the regulations to create the tradable allowances, and the bill defines many of the provisions governing the allowances. The bill would provide entities with options for banking and borrowing allowances; for limited use of registered reductions from noncovered entities in lieu of allowances [67]; and for obtaining allowance allocation credits to reward past emissions reductions and early action reductions. The bill would establish a nonprofit Climate Change Credit Corporation (CCCC) to facilitate the market in emission allowances, to buy and sell allowances, and to distribute proceeds from sales to mitigate the economic impacts of the program. The Secretary of Commerce would be responsible for allocating allowances to the covered sectors and to the CCCC, subject to the final approval of Congress. 

Each emission allowance would provide the right for an entity to emit one ton of greenhouse gases, measured in carbon dioxide equivalent units based on 100-year global warming potential. The number of allowances created each year would effectively establish a cap on total U.S. emissions; however, with the banking of allowances for future use permitted under the bill, emissions in any year could differ from the number of allowances issued [68]. The bill would require individual covered entities to submit allowances equal to their emissions but would not otherwise limit their emissions. An entity’s emission allowance obligation would be based on its reported annual emissions, mandated under the program. The bill calls for the future development of emissions measurement and verification procedures that could be used to audit an entity’s allowance obligation. Entities would be able to buy and sell allowances and to bank allowances for future use. Under limited conditions, covered entities could borrow against future emissions reductions [69]. 

Emission Caps 

The bill specifies emission allowance caps based on aggregate emissions for the covered sectors in 2000, excluding emissions from the residential sector, the agriculture sector, and U.S. territories [70]. The bill specifies the total number of annual allowances at 5,896 million metric tons carbon dioxide equivalent, adding the phrase “reduced by the amount of emissions of greenhouse gases in calendar year 2000 from noncovered entities.” This wording leaves the level of allowances that establishes the cap open to interpretation and questions of emissions accounting. Noncovered entities are those that have no facilities with annual emissions above 10,000 metric tons carbon dioxide equivalent; neither the identification of those entities nor their aggregate level of emissions in 2000 is known precisely. Because noncovered entities would not be required to report emissions, their emissions could be estimated only by subtracting covered entities’ reported emissions from estimates of total emissions. Noncovered emissions would also include emissions from sources the EPA deemed impractical to measure. Under these definitions, the level of emissions from noncovered sources would be unknown, and the number of allowances to be created after adjusting for noncovered emissions is uncertain. 

In a June 2003 analysis of S. 139 [71], EIA estimated that approximately 75 percent of total U.S. greenhouse gas emissions would be covered under the bill. The impact of the bill on total emissions would depend on growth in noncovered emissions and how covered entities made use of alternative compliance provisions, such as registered increases in carbon sequestration. 

Allowance Allocation, Allowance Banking, and Alternative Compliance Provisions 

The allocation of emission allowances to covered sectors and entities is not completely fixed by the bill. Some of the Government-issued allowances would be distributed directly to covered entities, and the rest would go to the CCCC. A number of criteria for allocating emissions allowances are defined in the bill, but neither the total percentage of allowances to be distributed free nor the share to be distributed to each of the covered sectors is specified. The bill does, however, describe an allocation procedure to reward entities for registered emissions reductions made since 1990 and reductions made in advance of the 2010 start date. Entities with creditable reductions would be granted a corresponding increase in their future allocations of allowances for the compliance period beginning in 2010. Credits for early action would not affect the overall compliance cap, only the allocation of free allowances to covered entities. Nevertheless, this provision would provide an incentive to reduce emissions early in exchange for future allowance allocations. 

The bill’s allowance trading and alternative compliance provisions would result in markets for emission allowances and registered offset credits. The market for allowances and related incentives should result in a market-clearing price for allowances that would reflect both the cost of reducing emissions and the flexibility of allowance banking. Because allowances could be sold or held for future use, covered entities would have an incentive to reduce emissions under the bill, even if they were allocated sufficient allowances to cover their annual emissions. Some entities would find it economical to over-comply and sell or bank emission allowances, depending on the cost of emissions reduction opportunities, future expansion plans, and expectations about future allowance prices. 

A market for the alternative compliance emission credits, or offsets, would also provide economic incentives for noncovered entities to reduce emissions and register their reductions. The bill would allow covered entities to submit such registered credits in place of up to 15 percent of their allowance obligations. Offsets could be registered by domestic sources as well as from other countries that have greenhouse gas emissions limits and comparable allowance trading provisions in place. The allowance offsets could also come from increases in biological carbon sequestration, such as through reforestation, and to a limited extent from changes in agricultural practices to increase net carbon sequestration in the soil [72]. Offsets would likely sell at or below the price for allowances. Suppliers competing to meet the limited demand for offsets could bid down the offset price to a level below the allowance price. 

Energy Market Impacts 

Energy consumers would incur higher effective costs of using energy as a result of the bill’s allowance program. In the transportation sector, end-use consumers would face higher delivered prices of refined products when refiners passed on the cost of allowances required for emissions of petroleum-based fuels sold for transportation [73]. Covered entities in the commercial, industrial, and electric power sectors would implicitly face a higher cost of consuming fossil energy, because they would be required to obtain allowances for carbon dioxide emitted in direct fuel use. To the extent that electricity generators could pass through the opportunity cost of allowances and related incremental capital costs to their customers, electricity prices would increase in all consuming sectors. The increased energy costs, whether incorporated in delivered prices or reflected implicitly as opportunity costs of consuming energy, would affect all energy sectors of the economy. 

The energy cost impacts on consumers and businesses could be substantially reduced by actions of the CCCC, which would be tasked to use proceeds from allowance sales to diminish the economic impact of the program. The extent to which the CCCC could funnel allowance proceeds back into the economy would depend on the allocation of allowances it received. The bill leaves the allocation of available allowances between the CCCC and covered entities unspecified. The CCCC share of allowances would be determined on an annual basis by the Secretary of Commerce, subject to approval by the Congress. 

The funds collected by the CCCC could be dispersed to energy consumers by various methods, including cash rebates, rebates for energy-efficient appliances, subsidies, and general transition assistance to displaced workers. The bill specifies that the CCCC must allocate a percentage of the proceeds from allowances to provide transition assistance to dislocated workers and communities; however, the transition assistance amount probably would be a small fraction of the total allowance proceeds collected. The remaining proceeds would be returned to the economy, possibly as rebates. As a result, the bill has the potential to compensate consumers to some extent for higher direct energy costs and the indirect impacts of higher prices for non-energy goods and services.

Notes and Sources

Contact: Daniel Skelly
Phone: 202-586-1722
E-mail: daniel.skelly@eia.doe.gov