On May 21, 2009, by a largely party-line vote, the US House Energy and Commerce Committee adopted H.R. 2454, which is called the “American Clean Energy and Security Act” and commonly referred to as the “Waxman-Markey bill” (reflecting the sponsors of this proposed legislation).  A highly ambitious attempt to reduce the use of fossil fuels and the emission of greenhouse gases (GHGs) through a combination of regulatory standards and market forces, H.R. 2454 sets the stage for further complex discussions in Congress.   

Here are a few key highlights from the approximately 1000-page bill:

  • Global Warming.  The heart of H.R. 2454 is a GHG cap-and-trade program that would be added to the Clean Air Act.  US GHG emissions from covered sources would be capped at 3% below 2005 levels in 2012, 17% below 2005 levels by 2020, 42% below 2005 levels by 2030, and 83% below 2005 levels by 2050.  Allowances to emit GHGs would be distributed according to a complex schedule specific to categories of recipients, and the amount available may vary from year to year.  But in the early years, approximately 85% of the necessary emission allowances would be distributed to regulated sources free of charge, with many going to regulated industries for over a decade.  Initially, the electricity industry would get approximately 35%, with local distribution companies receiving about 30% and merchant coal generators about 5%; local natural gas distributors, 9%; trade-exposed industrial sectors (as determined by US EPA), 2%; oil refiners, 2%; auto manufacturers, 3%; and  investors in carbon capture and storage, 2%.  A large number of allowances also would be allocated to recipients that are not GHG sources for a variety of public purposes, including adaptation and preventing tropical deforestation.  Further, US EPA would develop requirements for domestic and international offsets that could be used to satisfy a portion of the required emissions reductions. 

  • Renewable Energy and Energy Efficiency.  A utility selling at least 4 million megawatt hours of electricity in a year to consumers for purposes other than resale would be required to meet a combined efficiency and renewable electricity standard starting at 6% in 2012 and reaching 20% in 2020.  To qualify as renewable, electricity would need to be generated from specified resources such as wind, solar, geothermal, renewable biomass, certain hydropower, and landfill gas.  At least three-fourths of the threshold in any year would need to be met by renewables, with any remainder coming from demonstrated energy efficiency savings.  The proportion of savings could be increased to up to 40% of the threshold in individual US states.  Alternatively, retail electric suppliers would be permitted to make compliance payments to satisfy the standard.  At the same time, the bill would create incentives for commercial-scale deployment of carbon capture and sequestration.

  • Building Codes and Appliances.  New commercial and residential codes that are at least 30% more energy efficient than 2004 or 2006 codes would be developed within 3 years; later codes would need to be at least 50% more efficient.  For existing buildings, a retrofit program would be established, while a variety of detailed technical standards would be adopted for lighting and appliances. 

  • Transitioning to a “Clean Energy Economy.”   Funding would be provided for worker training, consumer assistance, and deployment of clean technology to developing countries.  Certain industrial sectors would be eligible for rebates to cover their compliance costs.

Clearing the House Energy and Commerce Committee is a significant step for this massive, complex legislation, but only the first of several.  Before it reaches the House floor, H.R. 2454 will journey through eight other House committees, including Agriculture, which is expected to focus on the use of offset credits and the role of the Commodities Futures Trading Commission in regulating energy commodities, and Ways and Means, which is expected to consider mechanisms for protecting consumers from potential price increases, trade issues, the process for auctioning allowances, and the disposition of auction proceeds.  It also remains to be seen whether the Senate will use H.R. 2454 as its template or develop its own legislation.  Henry Waxman (D. Cal.), Chairman of the House Energy and Commerce Committee, has indicated that he is expecting the Senate to come up with its own energy/climate bill.

As H.R. 2454 continues along what is likely to be a challenging legislative path, changes are almost inevitable.  Even Members of the House Energy and Commerce Committee already are discussing adjustments such as increased allowances for small refineries, more federal power over transmission siting, and adding certain sources of biomass as renewable.  Also sure to be subject of much discussion are whether the allowance allocations are appropriate and equitable, whether nuclear energy should play a greater role, whether stricter regulation of any carbon trading market is needed to prevent abuses, and whether the bill should continue to preempt state programs in the near-term.  

While the reported bill enjoys support from many environmental organizations, others have raised objections.  Industries and related organizations, like the Chamber of Commerce, similarly have taken a variety of positions on the legislation.  

Copies of the bill and the amendments considered during the Committee markup (whether agreed to or rejected) are available at http://energycommerce.house.gov/.  As of this writing, an integrated final version was not available.

For more information about H.R. 2454, or any other matter raised in this Client Alert, please contact David B. Finnegan, at +1 202 263 3301, or Roger W. Patrick, at +1 202 263 3343.