Sens. Joseph Lieberman (D-CT) and John McCain (R-AZ) have offered up a legislative proposal that would place limits on the amount of greenhouse gas emissions from U.S. power plants and other sectors of the economy. The legislation also provides for the trading of emissions allowances and includes penalty provisions for companies failing to meet emissions limits set out in the proposed legislation.

The proposal would require the Environmental Protection Agency to issue regulations to limit the greenhouse gas emissions from electricity generation, transportation and the industrial and commercial economic sectors. The affected sectors represent 85% of the overall U.S. emissions for the year 2000.

The bill would establish two targets, one for the year 2010 and the other for the year 2016. The 2010 target would set the U.S. emissions level for the affected sectors at 5,896 million metric tons (or the year 2000 levels). The 2016 target would set the U.S. emissions level for the affected sectors at 5,123 million metric tons (or the year 1990 levels).

The quantity of emissions would be specified, as opposed to specifying the year, and are based upon the EPA’s “Inventory of U.S. Greenhouses Gas Emissions and Sinks,” which is submitted annually to the United Nations as part of the U.S.’s commitment under the UN’s framework convention on climate change. The methodologies used are consistent with other international practices for measuring a country’s greenhouse gas emissions.

Under the bill, all covered entities — those that emit more than 10,000 metric tons of greenhouse gases per year — would be required to submit to the EPA one tradeable allowance for each metric ton of greenhouse gases emitted during the reporting period.

The secretary of commerce would be required to determine the amount of allowances to be given away or “grandfathered” and the amount to be auctioned. The secretary’s determination would be subject to a number of allocation factors identified in the bill.

Proceeds from the auction would be used to reduce energy costs of consumers and assist disproportionately affected workers. Consideration would be given to any company that would be willing to commit to meeting the year 2016 targets by the year 2010.

Alternatively, an entity could satisfy up to 15% of its emission reduction requirements by submitting tradeable allowances from another nation’s market in greenhouse gases, submitting a registered net increase in sequestration or submitting emission reductions that were registered by a person that is not a covered entity. After the year 2016, this limit would be reduced to 10%. If a covered entity has an excess of tradeable allowances for a reporting period, the entity may hold those allowances in order to sell, exchange or use in the future.

As for penalties, any company not meeting its emissions limits would be fined for each ton of greenhouse gases over the limit at the rate of three times the market value of a ton of greenhouse gas. The market value would be based upon the price of emission credits from the trading system provided for in the bill. Additionally, any company planning to make capital investments or deploy technologies within the next five years would be allowed to borrow against those expected future reductions to meet current year requirements. The loan would include a 10% interest rate.

The trading aspects of the bill would be accomplished by incorporating the registry system that was included in last year’s Senate-passed energy bill. The legislation would allow companies that realized a verifiable emission reduction to register that reduction in the registry and subsequently trade it on the open market.

Companies not regulated under the mandatory limits would be permitted to participate in the trading system. By participating, they would be required to report their emissions as part of the emission reduction verification process. This provision would allow regulated companies to trade emission reduction with non-regulated companies.

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