American Power Act Dangles Carrots for Nukes, Coal, Gas

Facing a difficult uphill slog in a sharply polarized Senate, Sens. John Kerry and Joseph Lieberman have unveiled long-awaited draft climate change and energy legislation that includes billions of dollars in incentives for the nuclear, natural gas and coal industries aimed at attracting enough bipartisan support to overcome an all but certain filibuster led by the Senate Republican leadership.

The 987-page bill (PDF), dubbed the American Power Act, would require reductions in U.S. greenhouse gas emissions of 4.75% below a 2005 baseline by 2013; 17% below the baseline by 2020; 42% by 2030; and 80% by 2050.

Cap-and-Trade Carbon

The bill would impose these emission caps first on the electric utility sector, but it would soften the blow for utility customers by providing enough free emission allowances to cover utility compliance obligations for the first years of the emissions cap-and-trade program the legislation would establish.

Through these utility allocations and other benefits targeted at U.S. consumers—particularly low-income consumers—the bill would send roughly two-thirds of all revenues from allowance sales back to consumers from "day one," Kerry (D-Mass.) and Lieberman (I-Conn.) said.

Some money from allowance sales would be dedicated to reducing the federal budget deficit—a nod to growing voter concerns about the size of the ever-mounting federal deficit.

From 2012 to 2030, utilities gradually would have to obtain an increasing percentage of their allowances at regular government allowance auctions, so that by 2030 utilities would have to purchase all their allowances, either in the auctions or from other regulated entities.

Beginning in 2030, most of the revenues from allowance auctions would be refunded to consumers, with a portion dedicated to deficit reduction.

The free utility allocations would be distributed on a weighted basis, based 75% on each utility’s historic emissions and 25% on sales.

Collar Cost of Carbon

To help control allowance costs—a key demand of the utility sector—the bill includes a "hard price collar" for allowances. Introductory floor and ceiling prices would be set at $12 and $25, respectively, with the floor price rising annually at 3% plus inflation and the ceiling price rising by 5% plus inflation each year. The bill also would establish a reserve allowance pool, borrowed from future years, to ensure that sufficient allowances are available if prices rise dramatically.

And meeting another key demand of utilities and other regulated sectors, state or regional greenhouse gas–reduction programs would be preempted by the bill. States that already have such programs in place—such as California and the 10 Northeast and Mid-Atlantic states participating in the Regional Greenhouse Gas Initiative—would receive compensation for revenues lost as a result of the termination of their climate change programs.

The bill also would strip the Environmental Protection Agency of some of its Clean Air Act authority to regulate greenhouse gases, expressly prohibiting the agency from classifying greenhouse gases as "criteria" pollutants to address global warming or ocean acidification. In addition, the EPA could not classify greenhouse gases as hazardous air pollutants or regulate emissions from capped sources under the air statute’s New Source Review or New Source Performance Standards provisions.

However, the bill requires the EPA to establish performance standards for carbon dioxide (CO2) emissions for coal-fired power plants built in 2009 and thereafter. Plants built in 2009 and through the end of 2019 would have to achieve at least a 50% reduction in CO2 emissions—equivalent to the emissions of a natural gas–fired plant. Plants built in 2020 and thereafter would have to achieve at least a 6% reduction in their CO2 emissions.

In addition, the bill provides annual incentives of $2 billion for researching and developing effective carbon capture and sequestration (CCS) technologies. The bill also provides incentives for the commercial deployment of 72 GW of CCS-equipped power plants.

Much Industry Support

Based on these provisions, investor-owned utilities will support the measure and press for its passage on the Senate floor, Edison Electric Institute President Thomas Kuhn said. "I think there are situations where everybody is going to look and say, ‘I can find ways to change it one way or another,’ but I think that basically we are very supportive of moving it forward to the floor," said Kuhn.

Significantly, the bill includes a broad package of incentives to increase nuclear power generation, including regulatory risk insurance for 12 new projects; accelerated (five-year) depreciation for new plants; a new nuclear investment tax credit; $54 billion in loan guarantee authority for nuclear plants; and a manufacturing tax credit to spur domestic production of nuclear plant components.

For the natural gas industry, the bill would provide a generous package of incentives to help transition today’s heavy truck fleet—currently powered by diesel fuel—to natural gas. This provision is part of a suite of provisions aimed at reducing U.S. dependence on foreign oil.

In addition, U.S. oil refiners and importers would have to purchase allowances to cover their process emissions and emissions resulting from the use of gasoline and other refined products. Revenues from these allowance sales would be used to support the federal Highway Trust Fund, state and local projects to reduce oil consumption, and emissions and transportation grant programs.

Keep America Competitive

To ensure the bill would not threaten the competitiveness of U.S. energy-intensive, trade-exposed (EITE) manufacturers by benefitting trade rivals in countries not bound by emission constraints, the bill would delay capping industrial emission sources until 2016. And prior to 2016, a portion of allowance revenues would be dedicated to offset electricity and natural gas price increases for industrial ratepayers and to improve energy efficiency in manufacturing. In 2016, EITE industries would receive allowances to offset both their direct and indirect compliance costs; these allowances would be distributed in a way that rewards efficiency investments.

To address imports from foreign companies not bound by emission limits, the bill would phase in a border-adjustment mechanism by requiring such imports to pay tariffs if no global agreement on climate change is achieved.

Earlier versions of the bill were said to have included provisions to expand domestic offshore oil production that largely mirrored the Obama administration’s call for opening large stretches of the Atlantic and Alaskan coasts to exploration and production.

But with oil still gushing into the Gulf of Mexico from a catastrophic spill from a BP plc deepwater well, Kerry and Lieberman inserted a number of changes aimed at giving coastal states an opportunity to block new oil production off their shores.

Under the new provisions, new drilling would be limited to areas at least 75 miles from the coasts of states seeking to opt in to drilling. In addition, when a state signals a willingness to allow drilling, the Interior Department would be required to report whether that drilling would pose "significant adverse ecological or economic" risks to adjacent states. If the department concludes the drilling would pose such risks, neighboring states could veto drilling by enacting legislation opposing the drilling. However, if the department finds drilling would not pose such risks, states would have no legal recourse to block a neighboring state’s decision to allow drilling.

It remains decidedly unclear whether these changes would mollify concerns held by Democratic Sens. Robert Menendez (N.J.), Frank Lautenberg (N.J.), or Bill Nelson (Fla.), fierce drilling opponents who warned that any legislation to expand offshore drilling would be "dead on arrival."

Chris Holly is a reporter for COAL POWER’s sister publication, The Energy Daily.

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