So I’ve been scraping through the latest Senate climate bill, read a copy here. I haven’t really focused yet on anything other than the emissions trading sections. Things are similar to other congressional bills insofar as coverage, targets, and compliance options. Here’s a quick summary of the things I’ve noticed.

Coverage The bill covered essentially the same entities but covers emissions differently. Instead of making fuel producers and importers being responsible for emissions from all the fuel they produce or import, the APA makes ‘refined product providers’ (RPPs) liable for all emissions for the fuel they are, at some point, responsible for except those emissions from fuel use by regulated entities. This makes more sense because regulations should aim to regulate at the point of emission where practical – if these entities already are responsible for some emissions, then it doesn’t make sense to carve some out and make others responsible for them (as the other congressional bills did). Covering RPPs will allow emissions from the millions of consumers (commercial and residential) to be brought into the system without actually covering each point of emission. One last note is that the bill wouldn’t take effect until January 2013, delaying application for manufacturing industries and natural gas distributors until 2016.

Targets The bill proposes an economy-wide emission reduction target of 17% by 2020 from 2005 (same for the target for reductions from covered entities). This is lower than the Kerry-Boxer senate bill, but in-line with the President’s pre-Copenhagen announcement.

Allowance distribution The new bill has no ‘pre-distribution’ set-asides. Allocations for  covered entities haven’t dramatically changed; emission extensive and trade exposed industry getting 2% in 2013-2015 and 15% per year out past 2020, natural gas distributors will get 9%, but refiners have been given a big boost in their allocation averaging about 4% per year out past 2020. I’ll note here also that in previous bills, there was a provision that limited the EITE allocation to the percentage allocated in the bill, despite that industry may qualify for a greater number of allowances by way of the distribution methods in the bill – if industry qualified for more than what was allocated, then each entity would receive a pro-rated share of the allocation. This limit doesn’t seem to be there anymore. With this missing (which I’ll assume for now is a mistake), it leaves the EITE allocation a bit uncertain.

But the big kicker with allowance distribution is the ability for the EPA Administrator to borrow allowances from the following year to ensure an adequate supply for the current year. What this does is effectively lower the cap in that following year, having the same effect as a ‘set-aside’ – e.g. the 15% for EITE would be of a smaller cap number so their absolute allocation will be less than if the borrowing hadn’t occurred. All of this is because of the unique way the bill provides allowances for the ‘refined product providers’ (i.e. commercial and residential gasoline, diesel, heating oil suppliers). The Administrator is required to sell to the RPPs all the allowances they need to cover their emissions obligations at a set price – and the RPPs are forced to buy those allowances (i.e. a fancy fuel tax). The Administrator gets these allowances from the amount of allowances that will be available for auction. If the allowances available for auction are less than what’s needed for the RPPs, the Administrator can borrow the necessary amount of the allowances from the following year. By rough estimates, this could happen as early as 2016. This means two things, by 2017 there would be no allowances available to be auctioned to other covered entities (therefore they’ll need the 2 billion offsets the bill creates), and the absolute allocations in the following year are lowered. All this will likely drive the price higher in future years, spurring the offset market and in-house reductions.

Compliance options With alot of the same options available as in previous bills, there’s not much new in terms of compliance. The bill has a reserve of allowances similar to the Market Stability Reserve in the Kerry-Boxer bill – the new bill allocates a certain percentage of allowances under the cap in each year to be sold at a fixed price starting at $25 for 2013 vintage allowances, but no banking of these allowances is permitted. This mechanism will help keep the average overall allowance price at a reasonable level but will only provide about 70Mt of allowances (1.5% of the cap) in the first years – the full ‘price collar’ impact that some are speaking of doesn’t really happen until much later (2040 – 2050). For most other allowances banking, trading, and borrowing is permitted along the same lines as other bills… unlimited banking and trading with free borrowing 1 year into the future and borrowing at 8% upfront interest for 2-5 years into the future. However, allowances sold to RPPs cannot be banked or traded.

2020 Effective reductions The allocations provided directly to covered entities in 2020 can be expressed as a percentage of their 2005 emissions, giving us a rough idea of what level of reductions are being required from each sector by 2020 in order to meet the 17% reduction target. Here are those effective reductions… with all numbers derived from EPA 2005 emission values for covered entities. These numbers also take into account estimates for system-wide borrowing to accommodate RPP allowance needs – estimating that about 2400Mt of allowances will be needed for RPPs in 2020.

Electricity: ~90% reduction (only industry allocation is to Merchant Coal and Long Term Generators)

EITE industry: ~10% reduction  (from all direct and indirect emissions)

NG Distributors: ~35% reduction

Refiners: ~20% reduction

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