Energy Information Administration (EIA) - Analysis of S.139, the Climate Stewardship Act of 2003

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Analysis of S.139, the Climate Stewardship Act of 2003

1. Introduction

Background

On January 9, 2003, Senators John McCain and Joseph I. Lieberman introduced S.139, the Climate Stewardship Act of 2003 (S.139), in the U.S. Senate.³⁴ S.139 would require the Administrator of the U.S. Environmental Protection Agency (EPA) to promulgate regulations to limit greenhouse gas emissions from large “entities”—almost all of the electric power, transportation, and industrial sectors and a small portion of the commercial sector as defined by EPA’s Inventory of U.S. Greenhouse Gas Emissions and Sinks.35 It would also provide for the trading of emission allowances and reductions through a proposed greenhouse gas database to be established by the Federal Government, which would contain an inventory of emissions and registry of reductions.

On January 28, 2003, Senator James M. Inhofe requested that the Energy Information Administration (EIA) perform a comprehensive analysis of S.139. On April 2, 2003, Senators McCain and Lieberman, cosponsors of S.139, made a further request for analyses of their bill. This Service Report responds to both requests for analysis.

U.S. Greenhouse Gas Emissions

Total greenhouse gas emissions in the United States in 1990 were 1,683 million metric tons carbon equivalent,^{36, 37, 38} of which 1,364 million metric tons, or 81 percent, consisted of carbon dioxide (CO2) emissions from the combustion of energy fuels. By 2001, total U.S. greenhouse gas emissions had risen to 1,883 million metric tons carbon equivalent, including 1,579 million metric tons carbon equivalent from energy combustion. EIA’s Annual Energy Outlook 2003 (AEO2003)³⁹ projects that greenhouse gas emissions will reach 2,178 million metric tons carbon equivalent in 2010, 29 percent above the 1990 level. U.S. greenhouse gas emissions are projected to rise at an average annual rate of 1.5 percent a year between 2001 and 2025, reaching 2,683 million metric tons carbon equivalent in 2025, 59 percent above the 1990 level and 42 percent above 2001 levels. Because energy-related carbon dioxide emissions are a large portion of total greenhouse gas emissions, any effort to reduce greenhouse gas emissions will likely have a significant impact on the energy sector.

To put U.S. emissions in a global perspective, the United States produced energy-related carbon dioxide emissions of 1.6 billion metric tons carbon equivalent or 23.9 percent of worldwide energy-related carbon equivalent emissions in 2001 (as noted in EIA’s International Energy Annual 2001).⁴⁰ Although continued increases in emissions are expected for the United States and other industrialized countries, much more rapid emission increases are projected for developing countries in Asia, the Middle East, Africa, and Central and South America. According to EIA’s International Energy Outlook 2003 (IEO2003),⁴¹ global carbon equivalent emissions from energy use are expected to increase at an average annual rate of 1.8 percent per year from 2001 (the base year in IEO2003) through 2010, reaching 7.7 billion metric tons carbon equivalent, to which the United States would contribute 23.4 percent. Over the entire period, from 2001 to 2025, global emissions from energy-related activities are projected to grow by 1.9 percent per year, reaching 10.4 billion metric tons carbon equivalent, with the United States accounting for 21.6 percent of the total in 2025.

Summary of S.139

Goal of the Bill. S.139 proposes a mandatory, domestic entity-level⁴² greenhouse gas emissions reduction program. It would provide for a program of scientific research on climate change, establish a National Greenhouse Gas Database (NGGD) to track the level and reductions of greenhouse gas emissions by entity and covered sector,⁴³ and establish a market-driven system of tradable allowances that can be used interchangeably within the covered sectors as a way to accelerate the reduction of greenhouse gas emissions in the United States. The stated goals of S.139 are to reduce greenhouse gas emissions and to lessen U.S. dependence on foreign oil.

Summary of Key Elements. S.139 includes three titles. The first would establish a program of research to support implementation of the bill. The second would establish a National Greenhouse Gas Database and Registry to collect, verify, and analyze information on greenhouse gas emissions and track reductions by covered and noncovered entities The third would establish the market-driven greenhouse gas emissions trading program. This report focuses on Titles II and III of the bill.

A. Title I—Federal Climate Change Research and Related Activities

Title I would establish a program of research both within and outside Federal agencies through the use of grants and program directives. Much of the research would be targeted at improving implementation of the remaining two titles of S.139. The goals of Title I fall within three categories: (1) Research Support (to measure the impact of the bill, identify and remove barriers to technology transfer, and establish incentives for the development of more efficient technologies); (2) Improve Measurement Technologies; and (3) Provide Small Business Support (although few programs for small businesses are explicitly described in the bill as currently proposed).

B. Title II—National Greenhouse Gas Database

Title II would establish the National Greenhouse Gas Database and Registry. The main components of the proposed Database are an inventory of greenhouse gas emissions and a registry of greenhouse gas emissions reductions and increases in greenhouse gas sequestration. S.139 would require the EPA to promulgate regulations to implement a comprehensive system for greenhouse gas emissions reporting, inventorying, and reductions registration within 2 years of enactment. It would require the development and establishment of a comprehensive set of measurement and verification methods and standards for the reporting and recording of greenhouse gas emissions, emissions reductions, sequestration, and atmospheric concentrations for use in the registry. This title also outlines the rules for reporting the inventory of emissions and reductions for both covered and noncovered entities. Beginning no later than July 1, 2008, each “covered entity” is required to submit a report to EPA describing, for the preceding calendar year, entity-wide greenhouse gas emissions (at the facility level). It also provides for the reporting of voluntary greenhouse gas reductions by both covered and noncovered entities. It would also establish annual database reporting requirements for EPA under which EPA is required to publish an annual report that describes the total greenhouse gas emissions and reductions, provide entity-by-entity and sector-by-sector analyses of the emissions and reductions, describe current atmospheric concentrations, and provide a comparison of current and past atmospheric concentrations of greenhouse gases.

C. Title III—Market-Driven Greenhouse Gas Reductions

Title III outlines the key feature of S.139, the market-driven approach to greenhouse gas reduction. It establishes the rights and uses of tradable allowances, sets forth the requirement that covered entities must acquire one tradable allowance per metric ton of greenhouse gas emissions, creates the ability to bank and borrow allowances, provides for accelerated participation by covered and noncovered entities, and sets the proposed penalties when covered entities do not meet the requirements. Title III would also establish the Climate Change Credit Corporation (hereafter referred to as the Corporation) and outlines its function. It includes four subtitles.

1. Subtitle A—Emission Reduction Requirements; Uses of Tradable Allowances

Subtitle A establishes the greenhouse gas emissions reduction process and outlines the use of tradable allowances. It sets out some basic requirements as follows:

Each covered entity must submit to the EPA Administrator one tradable allowance for every metric ton of greenhouse gases emitted.
Producers or importers of non-CO2 greenhouse gases must submit one tradable allowance for every metric ton they produce or import.
Each covered petroleum refiner or importer must submit one tradable allowance for each unit of petroleum product they sell for transportation uses that will produce one metric ton of greenhouse gas. S.139 notes that EPA will define the amount of greenhouse gases emitted when petroleum products are used for transportation.

A covered entity is not required to submit tradable allowances for any amount of greenhouse gas if the emissions are deposited in an approved geological storage facility (geologic sequestration). An entity may submit allowances that were either allocated to it, acquired from another entity (either covered or noncovered), or acquired from the Corporation. EPA can grant an exemption from the requirements of S.139 if it is determined that it is not feasible to measure or estimate emissions from the source category; however, S.139 also states that EPA cannot grant an exemption for carbon dioxide produced from fossil fuel.

The subtitle also sets out some alternative means of compliance for the years 2010 through 2015. A covered entity may satisfy 15 percent of its total allowance requirement by submitting tradable allowances from another nation’s market in greenhouse gas emissions, submitting a registered net increase in sequestration, submitting a greenhouse gas emissions reduction from a noncovered entity, or submitting credits obtained from EPA. The same alternative means of compliance still apply after 2015, but the portion that a covered entity may satisfy using this approach declines to 10 percent.

A covered entity can borrow tradable allowances from EPA for use in the current year based on anticipated emissions reductions in future years, but only from anticipated reductions in emissions that result from capital investment in equipment, the construction, reconstruction, or acquisition of facilities, or the deployment of new technologies for which the covered entity has executed a binding contract that will become operational within the current calendar year and will begin to reduce emissions from the covered source within 5 years after the year in which the credit is used. This loan is not free. There is a borrowing cost of 10 percent (in terms of tradable allowances) for each credit borrowed, multiplied by the number of years beginning after the year of use and before the year the reduction is expected to begin. If the covered entity fails to achieve the anticipated reduction, the covered entity’s allowance requirements shall be increased by the amount of the credit plus the borrowing cost.

Subtitle A would also establish procedures for automobile manufacturers to receive tradable emissions allowances for exceeding applicable corporate average fuel efficiency (CAFE) standards. To receive the allowances, however, manufacturers must exceed fuel efficiency standards by more than 20 percent. The exact conversion factor for the tradable emissions allowances relative to fuel efficiency is not established in S.139. It is important to note that the total quantity of allowances does not change as a result of this provision. These allowances come out of the pool of total allowances available to all covered entities.

In addition to being sold, exchanged, purchased, or retired, other possible uses for the tradable allowances are established in Subtitle A. The Corporation may sell tradable allowances allocated to it to any covered entity or to any investor, broker, or dealer in tradable allowances. Tradable allowances can be banked by an entity for use in future years. A covered entity that has more than a sufficient amount of tradable allowances to satisfy current requirements may hold allocated allowances in order to sell, exchange, or use the tradable allowances in the future.

2. Subtitle B—Establishment and Allocation of Tradable Allowances

The tradable allowance program would take effect beginning in 2010. Subtitle B establishes and provides procedures for allocating the tradable allowances. EPA is instructed to establish regulations to create tradable allowances for calendar years 2010 to 2015 equal to 5,896 million metric tons carbon dioxide equivalent and, for calendar years after 2015, equal to 5,123 million metric tons carbon dioxide equivalent, reduced by the amount of emissions of greenhouses gases in calendar years 2000 and 1990, respectively, from noncovered entities as defined in the bill. Each tradable allowance is to be assigned a unique serial number.

Based on the number of allowances, from 2010 to 2015, the maximum allowable greenhouse gas emissions by a covered sector (Phase I allotment) is equal to a portion of year 2000 total covered sector emissions, based on the sector’s percentage share of total covered sector emissions in the year preceding enactment.⁴⁴ After 2015, the maximum allowable emissions by the covered sector will be equal to its share of 1990 total covered sector emissions (Phase II allotment) using the same methodology for determining the shares as was used for the Phase I allotment. The Secretary of Commerce is charged with determining each covered sector’s Phase I and Phase II allotments and the amount allocated to the Corporation. Subtitle B lists certain factors that the Secretary of Commerce must consider in determining the number of allowances to be allocated, including:

Effect on income distribution
Impact on corporate income, taxes, and asset value
Impact on consumer income levels and energy consumption
Effects on economic efficiency
Ability of entities to pass through compliance costs
Whether allocation to covered sectors should decrease over time.

These are guiding principles. No other specifics about how the allocation should be computed are provided in S.139. While the Secretary of Commerce determines the number of allowances to be allocated to each covered sector, EPA is charged with actually allocating the Phase I and II tradable allowances to each entity in the covered sector and to the Corporation. The Subtitle establishes that EPA will allocate the tradable allowances for the electricity generation, industrial, and commercial sectors to the entities owning or controlling point sources of greenhouse gas emissions within the sector. The same is true for producers or importers of hydrofluorocarbons, perfluorocarbons, and sulfur hexafluoride. The tradable allowances for the transportation sector are to be allocated to petroleum refiners or importers that produce or import petroleum products that will be used as fuel for transportation.

Subtitle B establishes procedures for allocation of tradable allowances for early action and accelerated participation in the program. At the request of a covered entity that has registered reductions in a year before 2010 (early actions), EPA is required to allocate tradable allowances in an amount consistent with the registered reductions from the national greenhouse gas database, for use by the entity in the current year. The subtitle also establishes procedures for accelerated participation. If an entity executes an agreement with EPA under which it agrees to reduce its level of greenhouse gas emissions to an amount no greater than the level of emissions in calendar year 1990 by the year 2010, then for the 6-year period from 2010 to 2015, EPA will provide additional tradable allowances to that entity (the number or process for determining the number of additional tradable allowances is undefined in the bill). The total size of the allowance pool does not change when early participants are granted extra allocations. An entity can also satisfy 20 percent of its requirements (not 15 percent as previously specified) by submitting tradable allowances from another nation’s market in greenhouse gases, submitting a registered net increase in sequestration, or submitting a greenhouse gas emission reduction that was registered in the National Greenhouse Gas Database by a noncovered entity.

This Subtitle also provides for a review of the number of allowances established under S.139 every 2 years after enactment, to determine whether the number of allowances established continues to be consistent with the objectives of the United Nations Framework Convention on Climate Change (UNFCCC). Given the importance of the 2010 and 2016 allowance levels and uncertainty about the date of enactment, it also calls for a specific review of the number of allowances in 2008 and 2012. Subtitle B provides no additional information about what would occur if the number of allowances were found to be inconsistent with the objectives of UNFCCC.

3. Subtitle C—Climate Change Credit Corporation

Subtitle C would establish the Corporation as a nonprofit Federal corporation. The Corporation is charged with receiving and managing tradable allowances allocated to it by EPA. It can buy and sell tradable allowances in the market, but it may not retire tradable allowances that are unused. The Corporation is directed to use the tradable allowances and proceeds derived to reduce the costs borne by consumers as a result of the greenhouse gas reduction requirements of S.139. It establishes “possible” methods the Corporation can use (e.g., buydowns, subsidies, negotiation of discounts, and consumer rebates), but it does not explicitly state a mix or preference. Further, it requires that the proceeds derived from the Corporation’s actions be equitably distributed to the extent possible across all regions of the United States and that they may include arrangements for preferential treatment of low-income consumers. Subtitle C establishes that a percentage of the proceeds derived from trading activities, starting at 20 percent of the total proceeds in 2010, will be used to provide transition assistance. However, it also establishes that this transition assistance will be phased out over time (declining by 2 percent each year starting in 2011, but never reaching zero). No other specifics about the allocation of the proceeds are indicated.

4. Subtitle D—Sequestration Accounting; Penalties

Subtitle D establishes rules about the use of sequestration. Specifically, if a covered entity uses a registered net increase in sequestration to meet the required provision of one tradable allowance for each metric ton of greenhouse gas emissions emitted, the covered entity must submit information to EPA every 5 years to verify that the net increase in sequestration still exists. If EPA determines that the sequestration no longer exists, the entity must submit allowances to offset the loss of sequestration in the calendar year following the determination.

This subtitle also sets out the penalties for noncompliance with the provisions of S.139. If a covered entity fails to provide tradable allowances sufficient to cover its greenhouse gas emissions, it will be liable for civil penalties, payable to EPA, equal to three times the market value of the tradable allowances necessary to meet the requirements. The subtitle establishes no other specific penalties beyond this provision.

Unspecified Aspects of S.139 Necessary for Implementation and Analysis

S.139 stipulates a program for greenhouse gas emission monitoring and control. Some of the provisions are subject to varying interpretation and some will be defined only after passage of the Act by Congress and implementation by EPA, the Department of Commerce, or other parties and agencies. In addition to the usual challenges and uncertainties inherent in projecting the energy and economic effects of major policy changes, analysis of S.139 is further complicated by the uncertainty regarding how its provisions would be implemented. Key implementation features of S.139 that are not clearly specified include:

Definition of A Covered Entity: S.139 defines a covered entity as an entity that owns or controls facilities that collectively emit more than 10,000 metric tons (carbon dioxide equivalent) of greenhouse gas per year. While substantial energy and economic data exist on whole industries or on specific facilities, little is available on individual entities. Further, the issue of control or ownership of an entity is unclear. For example, is each individual McDonald’s franchise an entity, or is control defined at the company level? If a company divests a portion of an entity so that its total emissions fall below the 10,000 metric ton threshold, is it no longer covered?

Mechanisms for Allocating Emissions Allowances: In order to assess the macroeconomic impacts of S.139 on covered entities, two assumptions are needed. First, an assumption is needed regarding how emission allowances are allocated between covered sectors and the Corporation. The allocation has important implications for consumption and investment patterns that impact macroeconomic growth. Second, to assess the sectoral impacts of S.139, an assumption is needed regarding how emissions are allocated among covered entities. Both the allocation between the covered sectors and the Corporation and the allocation among covered sectors are to be defined by the Secretary of Commerce after passage of S.139. The bill provides guiding principles but little specific information on how these allocations are to be made.

Consumer Rebates: S.139 allows the Corporation to allocate the revenue it collects from the sale of emission allowances as rebates or subsidies to consumers, especially those who can least afford the energy price increases that are likely to result from the proposed legislation. The amount of money available for these rebates or subsidies and their allocations is unspecified.

CAFE Credits: S.139 includes a provision that allocates greenhouse gas emission allowances to manufacturers of light-duty vehicles whose CAFE exceeds the applicable CAFE standard by 20 percent. The provision states that the Secretary of Transportation, in consultation with the EPA Administrator, will determine the conversion factor used to translate fuel economy improvements into greenhouse gas emission reductions after the Act is passed. No additional information about the mechanism or conversion factor is included in S.139.

Focus of the Analysis

This study focuses on the questions posed in the two request letters,⁴⁵ subject to the limitation that we cannot address issues beyond EIA’s expertise or capability.

Request from Senator Inhofe. Senator Inhofe requested that EIA examine the following:

The effect of S.139 on global temperatures
The number of “S.139-equivalent programs” that would be needed to reduce projected future temperature increases to “acceptable levels”
The direct government cost entailed
The cost to the U.S. economy in jobs and dollars
• The demographic spread of economic costs
A comparison of the bill’s compliance period to the scheduled commitments for reduction of greenhouse gases by China, Mexico, South Korea, India, and Brazil
Energy “suppression” effects
A comparison of the efficiency of the bill’s regulatory mechanisms with that of a Btu tax mechanism.

In an initial reply to Senator Inhofe, EIA indicated that it would be able to fully address four of the eight items requested and to provide limited data and information on a fifth. The four items that EIA agreed to undertake were an analysis of the cost of the bill to the United States in employment and aggregate gross domestic product (GDP); estimation of energy conservation (suppression) effects related to the higher costs of energy that would be borne by consumers as a likely result of the bill; a comparison of the energy and economic impacts of an equivalent carbon tax⁴⁶ with those of S.139; and a comparison of the bill’s compliance period with those scheduled by China, Mexico, South Korea, India, and Brazil for their reductions of greenhouse gases. EIA also agreed to provide demographic data (by household income class) on the distribution of energy consumption and expenditures from its Residential Energy Consumption Survey, but not to forecast how such distributions might change as a result of S.139.

Request from Senators McCain and Lieberman. Senators McCain and Lieberman asked EIA to address the following:

The impact of a range of alternatives for the percentage of greenhouse gas allowances that would be allocated to the Corporation
The impact of early action compliance activities by both covered and noncovered entities on the costs of compliance
The impact of a range of new technology deployment to reduce greenhouse gas emissions on the cost of compliance, and the likelihood of the technology being deployed
The impact of banking by covered entities
The impact of various “flexibility mechanisms,” including: credit for reduction of non-CO2 greenhouse gases; credits from international trading; credits and offsets from increased automobile fuel efficiency and additional demand reductions for electricity from noncovered sectors; credits for geological sequestration and forestry activities; “borrowing” of allowances from future years; and increasing the percentage of “offsets” allowed for those entities that reduce their emissions to 1990 levels before 2010 (rather than 2016 as required by the bill).

Notes