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Cap-and-Trade Bill Clears First Hurdle in the House

The House Energy and Commerce Committee Thursday passed major Democrat-sponsored climate change legislation that seeks to significantly reduce carbon emissions over the next few decades, as well as bolster the authority of federal regulators in carbon and energy markets.

The bill (HR 2454), co-authored by Committee Chairman Henry Waxman (D-CA) and Rep. Edward Markey (D-MA), cleared the committee by 33-25, with four Blue Dog Democrats from southern and western states -- Reps. Mike Ross of Arkansas, Jim Matheson of Utah, Charlie Melancon of Louisiana and John Barrow of Georgia -- breaking from the majority to oppose the legislation. All Republicans on the panel, with the exception of Rep. Mary Bono Mack of California, voted against the measure.

"We want to slow or even reverse climate change. And we want our nation to become more energy independent. But we must do so in a way that won't threaten our offshore oil and gas industry," Melancon said.

During the marathon mark-up session, which last 37 hours over four days, Democrats fended off nearly every amendment offered by the Republicans to the 946-page bill. Republicans estimated 56 of their amendments were rejected (see Daily GPI, May 21).

The measure will now be taken up by a number of other House committees -- Foreign Affairs; Financial Services; Education and Labor; Science and Technology; Transportation and Infrastructure; Natural Resources; Agriculture; and Ways and Means -- before it is sent to the House floor. House Majority Leader Steny Hoyer (D-MD) said the various committees are expected to work through their portions of the bill quickly. The Democratic leadership wants the bill on the House floor before the August recess.

In addition to targeting carbon emissions, a proposal offered by Rep. Bart Stupak (D-MI) would amend the Commodity Exchange Act to provide the Commodity Futures Trading Commission with greater oversight authority of energy commodity derivatives and credit default swaps. And the legislation would amend the Federal Power Act to give the Federal Energy Regulatory Commission (FERC) strict oversight of carbon allowances and offsets to protect market participants from speculation and manipulation of carbon prices.

Moreover, the House bill gives FERC the authority to issue "cease-and-desist" orders against companies and/or traders who "may be violating, may have violated or may be about to violate any provision" of the Natural Gas Act, or any agency rule or regulation.

"We think that even though the bill reported from committee includes many compromises compared to the initial draft, moderate Democrats in the House are still divided on whether to support it" when it reaches the floor, said energy analyst Christine Tezak of Robert W. Baird & Co. Still, it's expected that the legislation will pass the House.

But the climate change bill could run into problems in the Senate, particularly with its renewable electricity standard (RES) and emission allocations. Action by the Senate Energy and Natural Resources Committee Thursday signals that Chairman Jeff Bingaman (D-NM) has the votes to pass a RES that is less aggressive than the version in the House climate change bill.

The Senate version, which would be included in a broad energy bill, would require suppliers to produce 15% of their electricity from renewable fuels by 2021, and 26.67% of the RES requirement could be met through improvements in energy efficiency. But the House version would require utilities to obtain 20% of their electricity from renewable sources by 2020, with up to 25% of that to be met with energy efficiency. The House RES does not include nuclear or hydro power as renewable sources.

"If the Waxman bill passes in its current form or close to it -- particularly as it comes to the distribution of free allocations to impacted industries -- we don't think it will pass the Senate. To garner the needed 60 votes to prevent a filibuster and pass a bill this year, we think the Senate will include more free allocations, a lower 2020 target than the 17% reduction from the 2005 baseline the House currently proposes, and possibly both," Tezak said. The House bill seeks to cut heat-trapping greenhouse gas emissions by 17% from 2005 levels in 2020; by 42% in 2030; and by 83% in 2050.

"I think it will be a heavy lift to have a comprehensive climate change bill come out of conference this year and head to the president's desk," said Red Cavaney, senior vice president of government and public affairs for ConocoPhillips, last month (see Daily GPI, April 24). "I think that we're far enough along [to realize] that it's going to take a while to put a comprehensive bill out."

The centerpiece of the climate change legislation is a system that would set a cap on carbon emissions and allow polluting industries to purchase and trade emission credits to comply with the cap. Moderate Democrats on the committee signaled that they would oppose the bill if Waxman and Markey proposed auctioning of emission credits rather than awarding free allowances to affected industries during the transition period. After weeks of negotiations, Waxman and Markey agreed to free emission allowances for certain industries.

The House climate change measure would allocate approximately 85% of emission credit allowances for free to affected industries -- natural gas distributors, electricity distributors, energy-intensive manufacturers (i.e. steel, aluminum, paper and chemicals), automakers and refiners -- to offset the costs during a transition to a lower carbon environment (see Daily GPI, May 18). Most of the free allowances would phase out after 2025, to be replaced by the auctioning of emission credits.

The American Petroleum Institute (API), which represents oil and gas producers, criticized the allocation system in the bill. "While the bill has laudable environmental and economic goals, its inequitable system of allocations remains intact and if enacted would have a disproportionate adverse impact on consumers, businesses and producers of gasoline, diesel fuel, jet fuel, crude oil and natural gas," API President Jack Gerard said. "There is time to get this right. As the bill moves to the full House, we ask lawmakers to look at all the consequences of the bill."

Natural gas utilities' residential and commercial customers would be exempted from the House bill's carbon cap until 2016, said the American Gas Association (AGA), which represents gas utilities. AGA commended the committee for excluding the energy efficiency resource standard from its cap-and-trade bill, which would have penalized gas utilities should their customers fail to achieve the carbon-reduction targets.

Rep. Joe Barton (R-TX) Thursday offered a Republican substitute amendment that would have scrapped the cap-and-trade system and replaced it with performance standards for fossil fuel plants. "We take a carrot approach," he said. Republicans had argued that a cap-and-trade program would be too costly for industries and would trigger a flight to overseas markets. It also proposed a RES, which -- unlike the Democrats' version -- would apply to hydro power, nuclear and clean coal technology.

Barton's amendment was defeated 35-19.

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