Carbon trading to be highly regulated under Senate energy bill

The American Power Act mandates an economy-wide reduction in global warming pollution of 83% of 2005 levels by 2020, falling to 17% by 2050. This would be achieved initially via a cap-and-trade scheme for the largest US producers, covering the 7,500 factories and power plants that emit more than 25,000 tons of carbon pollution annually.

The legislation would establish a collar to keep carbon prices between $12 and $25 per tonne. Participation in the auction and primary cash markets would be restricted to compliance entities and a limited number of market makers, according to the legislation. The secondary market would be open to all participants but would operate on a cash-cleared basis and would be highly regulated and exchange-traded.

As expected, the Commodity Futures Trading Commission (CFTC) would have jurisdiction over trading of greenhouse gas instruments under the Commodity Exchange Act. The legislation would also require the CFTC to impose position limits to prevent excessive speculation.

However, the overriding belief among industry players is that the legislation will be difficult, if not impossible, to pass this year. Republican Senator Lindsey Graham withdrew his support for the bill two weeks ago following a row over legislative priorities, leaving Democrat Kerry and Lieberman, an independent, lacking significant Republican backing.

“It’s a very difficult environment in which to get this bill moved through the Senate, much less through both houses and then signed into law this year, given the agenda for financial reform, the need to appoint a new Supreme Court Justice and various other must-have appropriation legislation that has to be dealt with,” said William Bumpers, an environmental partner and head of the global Climate Change Practice at law firm Baker Botts.

Eileen Claussen, president of the Pew Centre on Global Climate Change, said: “The true test lies ahead. Any successful effort in the US Senate will require bi-partisan support. The senators must move quickly to attract the necessary support to pass legislation. Should these efforts fall short, it will be imperative that the White House and Senate leadership of both parties work together to find a viable path forward for clean energy and climate legislation this year.”

The legislation incentivises offshore drilling, which is widely seen as a political concession to attract Republican support. But, in light of the recent Gulf of Mexico spill, it would allow coastal states to opt out of drilling up to 75 miles from their shores.

The wide-ranging bill also covers a range of other energy-related issues, including: domestic development of nuclear power and carbon capture strategies; performance standards for coal-fired power generation; renewable energy and energy efficiency; and clean transportation.

Bumpers added: “The bill contains some key components necessary for industry support, including pre-emption of Environmental Protection Agency regulation and state regulation of cap-and-trade programmes for carbon dioxide emissions. It’s also got the quid pro quo that senator Graham had been negotiating for, namely domestic oil & gas development, as well as support for nuclear and carbon capture. So the balance is there to try to lure bipartisan support.”

There is a possibility bipartisan support could emerge and the legislation could move towards passage quickly, but even if the bill is not enacted this year Bumpers believes this draft provides a workable framework for developing legislation that could pass in a future Congress.

Log on to risk.net for further analysis of the American Power Act over the coming days.

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