Transcript Document

BEIJING
BRUSSELS
CHICAGO
DALLAS
FRANKFURT
GENEVA
HONG KONG
LONDON
LOS ANGELES
NEW YORK
SAN FRANCISCO
SHANGHAI
SINGAPORE
SYDNEY
TOKYO
WASHINGTON, D.C.
U.S. Climate Change Legislation and Regulation –
State of Play and Cross-Border Aspects Andrew Shoyer
July 2009
Washington
[email protected]
Overview
• Governmental challenge in addressing climate change
– How to deal with the big externality
• Current treaty-based rules
– UN and WTO
• US experience
– Legislative and regulatory
– National and state-level
• International negotiations
2
A truly global problem and solution
The problem
“Greenhouse gas (GHG) emissions are externalities and represent
the biggest market failure the world has seen.”
- Sir Nicholas Stern, “The Economics of Climate Change” (2008)
The objective
Stabilization of global temperatures – avoid higher than 3.4 degree
Celsius increase per G8 (2 degree per European Union)
The solution
“At the heart of good policy will be a price for GHGs—this is a
classic and sound approach to externalities and is crucial for an
incentive structure both to reduce GHG emissions and to keep
costs of abatement down.”
- Sir Nicholas Stern, “The Economics of Climate Change” (2008)
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Source: Environmental Defense Fund
US Starting Point – What Produces Emissions?
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Major Concerns
The cross-border policy concerns associated with the
regulation of greenhouse gas emissions range across a
spectrum, from the purely economic to the purely
environmental
Economic
Environmental
<------------------------------------------------------------------->
Loss of
Carbon
Loss of
Competitiveness
Leakage
Effectiveness
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Policy Options
• Internal measures
– Free allowances
– Output-based rebates
• External measures
– Border tax
– Allowance requirement
– Sectoral carbon-intensity standard
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Treaty Rules - UNFCCC
• “Measures taken to combat climate change, including
unilateral ones, should not constitute a means of
arbitrary or unjustifiable discrimination or a disguised
restriction on international trade.”
- Article 3 (Principles), paragraph 5, UN Framework
Convention on Climate Change (1992)
- Highlighted text is taken from Article XX, WTO General
Agreement on Tariffs and Trade 1994
• “All Parties, taking into account their common but
differentiated responsibilities and their specific national
and regional development priorities, objectives and
circumstances, shall . . . .”
– Article 4 (Commitments), paragraph 1, UNFCCC
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Treaty rules – WTO
Internal regulation or import measure?
• If it is considered an internal regulation (affecting domestic
and imported goods), then
– GATT Ad Article III – Generally permitted if “applies to an
imported product and the like domestic product”
• WTO-UNEP Report (2009) -- Border tax adjustments permitted,
under certain conditions, on imports and exports goods
• Distinction between indirect taxes (e.g., on products or value added)
and direct taxes (e.g., on income)
– GATT Article III:4 -- A government may not treat imported
goods less favorably than like domestic goods, so as to afford
protection to domestic production.
• Emphasis on conditions of competition
• But are goods made with different levels of GHG emissions “like
products” – process or production method (PPM)?
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Treaty rules – WTO
Internal regulation or import measure? (2)
• If it is a border measure (affecting imports), then
– GATT Article II: A government may not impose customs duties
or other duties or charges on imports in excess of its scheduled
tariff concessions.
– GATT Article XI: A government may not impose restrictions,
other than duties, taxes or other charges, on imports.
• BUT either way, if the measure distinguishes between the
goods of different countries (e.g., based on their GHG
emissions), then
– GATT Article I: Most-favored-nation treatment
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Treaty rules – WTO
General exceptions
• Even if a measure violates a GATT rule, a government may
impose it anyway if
– GATT Article XX(b): necessary to protect human, animal or
plant life or health, OR
– GATT Article XX(g): relating to the conservation of exhaustible
natural resources, taken in conjunction with restrictions on
domestic production or consumption, AND
– GATT Article XX chapeau: not applied in a manner that would
constitute
• Means of arbitrary or unjustifiable discrimination between countries
where same conditions prevail, or
• Disguised restriction on international trade
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Treaty rules – WTO
Free allowances - Subsidies
• A measure is actionable as a subsidy if – SCM Article 1: a government provides a financial contribution,
e.g., revenue is foregone, and confers a benefit
– SCM Article 2: it is specific to certain enterprises
– SCM Article 5: it creates adverse effects to the interests of
another Member government, including injury to a domestic
industry, or
– SCM Article 6: serious prejudice, which could include price
supression in a third country market
• A subsidy could be challenged –
– in a countervailing measure proceeding or
– in a WTO dispute settlement proceeding
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Source: Environmental Defense Fund
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Source: Environmental Defense Fund
Overview
Regulatory Action
Legislative Action
National
Environmental
National Waxman/Markey bill Protection Agency (EPA)
State
CA
State - CA
International
Negotiations
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Climate Change Regulation
The Way It Should Work
Global Consensus
Federal Legislation
Federal Regulation
Regional and Local Implementation
Litigation
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Climate Change Regulation
The Way It Is Working in the United States
Global Consensus
Federal Legislation
Federal Regulation
Regional and Local Implementation
Litigation
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The Transition to a Carbon Constrained U.S.
Who will get there first?
EPA’s path is a virtual certainty.
• President Obama has committed to finalizing the
first GHG regulations
• EPA is presently pursuing three climate change rulemakings
simultaneously; more proposals this summer
• Environmental NGOs will use courts to force action
Quick developments in the House
, but less certain future.
• House of Representatives has passed American
Clean Energy and Security Act
• Passage by Senate appears more challenging
And then there’s Copenhagen…
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The Transition to a Carbon Constrained U.S.
What will carbon controls look like?
EPA will use command and control approach
• Will try to adapt existing Clean Air Act
provisions to regulate energy use
• Will develop micro-sector-specific approaches
• Will aim to control energy by requiring technology redesign and workplace
standards
• Will lead to unintended consequences under Clean Air Act
Congress will develop market based system
• Focus has been on cap and trade, but carbon tax
is favored by some
• Will impose industry-wide restrictions on GHGs
• In theory, should be comprehensive and preempt Clean Air Act command
and control approach, but House bill leaves much Clean Air Act authority in
place
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The Transition to a Carbon Constrained U.S.
When will controls be enacted?
EPA intends to enacts finalize first GHG in March 2010
• First GHG rules will apply to cars and light duty
trucks, but will trigger regulation for virtually all sectors
• EPA currently laying regulatory foundation for broad Clean Air Act
regulation
• Mandatory GHG reporting rule will take effect January 1, 2010
H.R. 2454 would implement cap on
emissions in 2012
• 2012 emissions could not exceed 97 percent of 2005 emissions
• But 2012 target assumes passage in 2009
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Waxman-Markey Bill
American Clean Energy and Security Act of 2009
• 110th Congress saw a number of cap-and-trade bills
– many of them with border measures, none voted on
• 111th Congress: “dramatically improved” prospects for
climate change legislation
– President Obama called on lawmakers to send him
“legislation with a market-based cap on carbon pollution”
– Well-placed advocates in Congress
• Waxman/Markey bill passed House on 26 June
– Very close vote of 219 to 212
– Now focus moves to Senate, markup by end July
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Waxman-Markey Bill
“A legislative
Susan Boyle”
Chairman Waxman
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Waxman-Markey Bill
Main Elements
• Renewable Energy Standards
• Energy Efficiency
• Emissions Trading Scheme (“cap-and-trade” regime)
• Transition to a Clean Energy Economy (including
competitiveness and adaptation provisions)
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Waxman-Markey Bill
Impacted Industries
• Section 722 prohibits emissions of GHGs unless owner or operator
holds necessary allowances for “capped emissions” from the
following “covered entities”:
– Electricity sources
– Fuel producers and importers (>25,000 tons/year)
– Industrial gas producers and importers (>25,000)
– Nitrogen trifluoride sources (>25,000)
– Geological sequestration sites
– Industrial stationary sources (see 700(12)(F)-(H))
– Industrial fossil fuel-fired combustion devices (>25,000)
– Natural gas local distribution companies
– Algae based fuels
– Fugitive emissions
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Waxman-Markey Bill
Non-Capped Sources
• For most non electricity generating sources, Bill establishes
threshold of 25,000 tons/year CO2e.
– But Section 811 mandates EPA to regulate certain sources
between 10,000 and 25,000 tons/year CO2e through Clean Air
Act Section 111 New Source Performance Standards.
– And Section 722(g) authorizes EPA to lower the threshold to
10,000 tons/year CO2e in 2020.
• Thus, smaller sources not subject to cap today could
face EPA regulation immediately or be subject to cap
in future.
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Waxman-Markey Bill
How the Cap and Trade Works
• “Covered Entities” much generate an allowance for each ton
of CO2 equivalent of “Capped Emissions”
• Some facilities will not be “covered entities” unless they emit
above specified threshold.
• For covered entities, emissions are generally “capped
emissions” if they are generated by fossil fuel combustion.
Renewable biomass and liquid fuels generally do not
generate “capped emissions.”
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Waxman-Markey Bill
Carbon reductions
• Reductions under the cap-and-trade regime and overall
economy
– 3% below 2005 levels by 2012
– 17% by 2020 (overall economy 20%)
– 42% by 2030
– 83% by 2050
• Creates a market-place for allowances
– allows banking and borrowing
• Start 2012, phase in complete by 2016
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Offsets
• Permits capped sources to use up to 2 billion offsets of allowances
annually (split between domestic and international offsets)
• Title V (Peterson Amendments) apply to domestic agricultural and forestry
projects; Title VII applies to other projects.
• Steps to generating offsets
– (1) USDA or EPA rulemaking;
– (2) project certification;
– (3) project verification.
– But ACESA (Section 795) also allows exchange for early action offset credits
from certain state and voluntary programs.
• Offsets as cost containment
– CBO: Together, the provisions allowing the use of domestic and international
offsets would decrease the price of GHG allowances by $35 (69 percent) in
2012.
– EPA: Without international offsets, costs of allowances would increase 96
percent.
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Waxman-Markey Bill
Rebates to address carbon leakage
• Specifies distribution of emission allowances to key
sectors or for certain key purposes; rest auctioned off
• Carbon-based rebates (i.e., free allowances)
– Available to eligible industrial sectors with
• 5 percent – energy or GHG intensity
• 15 percent - trade intensity
• Which sectors? Determined by 2011
– Rebate calculated based on sum of
• direct carbon factor
• indirect carbon factor
• Designed to cover compliance costs from 2012 through
2025, then rebates will phase out from 2025 until 2035.
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Waxman-Markey Bill
Allowance requirements on imports
• Soon after enactment, the President must
– notify other countries that it is US policy to address climate
change through international agreements,
– request that other countries take appropriate measures to limit
their GHG emissions, and
– indicate that imported goods may be subject to international
reserve allowance requirements beginning in 2020.
 The President will report to Congress by 2017 on the
effectiveness of rebates in preventing carbon leakage and
the usefulness of imposing an international allowance
requirement on imports of covered goods, defined as
- industrial goods that are energy- and trade-intensive, or
- manufactured goods if EPA determines they should be covered.
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Waxman-Markey Bill
Purpose of international allowance requirement
• What is the stated purpose of the program?
– “To induce foreign countries, and in particular, fast-growing developing
countries, to take substantial action with respect to their greenhouse
gas emissions consistent with the Bali Action Plan” under the UNFCCC,
and
– “to ensure measures . . . are designed and implemented in a manner
consistent with applicable international agreements.”
- “Congress finds that the purposes . . . can be most effectively
addressed and achieved through [negotiated] agreements.”
– “Work proactively under the [UNFCCC] and other fora to establish
binding agreements, including sectoral agreements, committing all
major [GHG]-emitting nations to contribute equitably to the reduction
of [GHG] emissions.”
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Waxman-Markey Bill
Establishment of allowance requirement
 If by 2018 the United States has not entered into an
international climate change agreement, then the President
shall establish an international reserve allowance program
 UNLESS the President determines it would not be in the national
interest AND
 Congress passes an affirmative joint resolution within 90 days.
 EPA would create a pool of international reserve allowances
separate from the allowances that domestic entities must use
to comply with their cap-and-trade obligations
 EPA would sell the international reserve allowances at the
same price at which the domestic allowances are offered for
sale
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Waxman-Markey Bill
Sectoral coverage of international allowances
To identify the industrial sectors subject to the international
reserve allowance requirement, the President shall by July
2018 determine whether, for any carbon-intensive sector,
more than 85 percent of imports come from countries that
meet one of three criteria:
(1) the country has taken in an international agreement a
nationally enforceable, economy-wide emissions reduction
commitment at least as stringent as the US commitment;
(2) the country and the US are parties to a sectoral
international agreement; or
(3) the energy or carbon intensity of the sector is equal or
less than in the US
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Waxman-Markey Bill
Sectoral coverage of international allowances (2)
• If the President identifies an eligible sector where the
percentage/criteria are not met, then he must extend
rebates and impose an international reserve allowance
requirement.
– But EPA must adjust to as low as zero the international reserve
allowance requirement for a sector to account for the benefit to
that sector of free allowances to electricity providers and
rebates to industrial sectors.
• If, on the other hand, the President identifies a sector for
which the percentage/criteria are met, then the President is
prohibited from applying an international allowance
requirement.
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Waxman-Markey Bill
Country exemptions from international allowances
• The goods of a country would be exempt from an
international reserve allowance requirement if it – meets any of the three criteria on slide 17 (for a sector);
– is listed by the UN as a least developed developing country; or
– is responsible for less than 0.5 percent of global emissions and
5 percent of imports of covered goods with respect to the
eligible sector.
• SO . . this creates strong incentive for a country to –
– enter into a post-Kyoto multilateral climate change agreement
AND take a carbon reduction commitment, OR
– enter into agreements (at least bilateral) with the US on its key
sectors
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Waxman-Markey Bill
Support and next steps
• What is the support for such legislation?
– Administration and well-placed advocates
– Difficult economic times
– Party lines not a wholly accurate predictor
• Further steps:
– Mark-up in EPW Committee (Boxer), review by Finance, others
– Consideration and vote by Senate
– Conference between House and Senate
– Passage by House and Senate
– Signature by President
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Overview
Legislative Action
Regulatory Action
National Environmental Protection
Waxman/Markey bill
Agency (EPA)
State - CA
Clean Air Act
International
Negotiations
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Regulatory Action by the EPA
under the Clean Air Act
• In 2007 Supreme Court rules that CO2 fits within the
definition of “air pollutant” in the Clean Air Act
• Pres. Bush directs EPA to respond
• In 2008, EPA issued an Advance Notice of Proposed
Rulemaking (ANPR)
• In April 2009, EPA published a proposed endangerment
finding
– Comments received through June 2009
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Portfolio of EPA Rulemakings
GHG Controls
•
Endangerment finding (proposed April 17, 2009; comment period closed June 23, 2009;
finalized prior to March 2010)
•
Section 202 GHG regulation for cars and light duty trucks (proposed August 2009; finalized
March 2010)
•
PSD (“prevention of significant deterioration”) threshold rule (to be proposed and finalized prior
to March 2010)
Other Rules and Actions
•
Greenhouse gas inventory rule proposal (proposed March 2009; comment period closed June 9,
2009; likely finalized November 2009; implementation January 1, 2010)
•
Renewable fuels rule proposal (proposed May 5, 2009; goal of finalizing in August 2009 and
implementation January 1, 2010)
•
Stationary source permitting for new and modified units (Obama Administration reconsidering
Bush Administration decision not to impose GHG controls on permits)
•
California waiver decision (Obama Administration reconsidered Bush Administration denial of
request for waiver to address GHGs; granted waiver on June 30, 2009)
•
Carbon sequestration proposal (public comment period closed; possible final rule in early 2010)
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Regulatory Action by the EPA
under the Clean Air Act
• Far-reaching regulatory action
– mobile sources (from lawnmowers to heavy-duty trucks)
– stationary sources? (residential and industrial)
– standards on renewable energy, energy efficiency
– product lifecycle standards, e.g. for fuels (including GHG
emissions during production)
• But may not implement a cap-and-trade regime (?) and
cannot provide subsidies to affected industries
– also no authority to impose border measures
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EPA action vs. legislative action
• EPA regulatory action runs parallel to legislative process,
until legislation is enacted
– Waxman/Markey bill would preempt EPA action
• EPA regulatory process provides Obama administration with
leverage to get legislation enacted
– EPA regulation comes without any subsidies or cap-and-trade
flexibility
• However, EPA regulatory process might also be an incentive
for Administration and Congress to avoid passing legislation
that might cost a lot of jobs
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How do these developments affect
international negotiations?
• Enactment of legislation would signal willingness and ability
of US to commit to binding reduction targets
• What if by December a bill has cleared only the House, and
not yet the Senate?
• Provision for border measures – its effects on international
negotiations
– source of leverage gone?
– less confrontational/unilateral
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Overview
Legislative Action
Regulatory Action
National Environmental Protection
Waxman/Markey bill
Agency (EPA)
State - CA
Clean Air Act
International
Negotiations
43
Current: Kyoto Protocol
• Kyoto Protocol to the UNFCCC (adopted 1994; entered into
force 2005)
– Sets binding targets for 37 industrialized countries and the
European community for reducing greenhouse gas (GHG)
emissions
– Average of five per cent reduction against 1990 levels over the
five-year period 2008-2012
– US never ratified
• Conference of the Parties to the UNFCCC scheduled to be
held in Copenhagen, Denmark, in December 2009
– Bali Action Plan to supplement UNFCCC, replace Kyoto Protocol
with an agreement US can ratify
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Road to Copenhagen
• Frequent negotiations under UNFCCC (Bali Action Plan) in
Bonn, Germany
• G8 and G20 (Major Economies Forum) meetings
• Bilateral meetings
– Including US-China Strategic and Economic Dialogue (July
2009)
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Impact on National Efforts?
• If Congress passes climate change bill before international
agreement reached, agreement not likely to determine
national reduction targets
– But could influence EPA regulation
• Much more likely to affect international obligations on – funding developing countries
– sharing technology
– protection of intellectual property rights
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