In June 2005, Senator Jeff Bingaman (D-NM) drafted a proposal to impose mandatory limits on greenhouse gas emissions, based on the recommendations published by the National Commission on Energy Policy (NCEP). A draft bill of the proposal was named the “Climate and Economy Insurance Act of 2005,” although the bill was not formally introduced into Congress.
The Act would require the Secretary of Energy to set emissions intensity targets for years starting in 2010, and to translate these intensity targets into an annual cap on greenhouse gas emissions (GHGs). The cap would apply to “upstream” fuel producers and other entities including manufacturers, importers and emitters of non-fuel GHGs, and would provide for trading of emissions allowances between covered sources. The Act includes a safety valve price that may be paid in lieu of an allowance, limiting the cost of compliance, but also allowing emissions to rise above the established cap. The Energy Information Administration (EIA) projects that, at the safety valve price recommended by NCEP, emissions would exceed the target caps after 2016 and rise through the foreseeable future, though at a somewhat lower rate than projected under a “business as usual” scenario. (See graph of emissions according to the cap, and actual expected emissions due to use of the safety valve.)
Target: Each year’s target cap would be calculated on the basis of “emissions intensity,” defined as the total amount of covered GHG emissions divided by the forecasted Gross Domestic Product (GDP). In 2006, the Department of Energy (DOE) would calculate the target cap for each calendar year from 2010 through 2019 by (a) projecting the emissions intensity expected for 2009 (based on EIA’s projections of GDP and GHG emissions), (b) reducing that amount annually by 2.4% to arrive at the “emissions intensity target” for each year through 2019, and (c) multiplying the year’s emissions intensity target by the GDP forecasted for that year to arrive at an absolute emissions cap. In 2016, DOE would issue the target caps for 2020 through 2024 using the same procedure, but with a 2.8% reduction rather than 2.4%. The procedure would be repeated every five years, but could be modified under the Congressional Review procedure.
Allowances: The Act would annually require regulated entities to submit an allowance or pay the safety valve price for each ton of GHG emissions. Regulated entities include regulated fuel distributors (natural gas pipelines, petroleum refineries, coal mines of a certain size, natural gas processing plants, and fuel importers) and non-fuel regulated entities (producers or importers of HFCs, PFCs, SF6, or N2O; cement or lime producers; aluminum smelters; and various other non-fuel-related emitters). Fuel distributors would submit allowances based only on their covered fuels, while non-fuel entities would submit allowances based only on their non-fuel-related GHGs.
Allocation of Allowances: The bill specifies the amount of allowances that would be allocated for free, with 91% of emissions allocated in 2010, gradually dropping to 87% allocated after 2019. The Secretary of Energy would distribute the allowances to regulated entities and other affected sectors in such a way that offsets—but no more than offsets—expected losses of profits attributable to this program. One percent of allowances would be provided to organizations assisting affected workers. A small percentage of allowances would be auctioned rather than allocated, starting with 5% in 2010 and rising to 10% after 2019. Each year, an additional 3% of allowances would be reserved for offsets and 1% for early reductions. Any undistributed allowances would be auctioned.
Cost-Reducing Mechanisms: The most important cost reducing mechanism would be the provision allowing any entity to avoid submitting allowances by paying the “safety valve” price, starting at $7/ton-CO2 in 2010, and annually rising in price by a nominal 5% (i.e., not adjusted for inflation). As mentioned, this would assure an upper bound on costs, but also make it highly likely that emissions each year after 2016 would exceed the target caps. In addition, to minimize the cost of the program, allowances and credits could be sold, exchanged, purchased, or transferred. Credits, which could also be submitted in lieu of an allowance, would be distributed to entities that geologically sequester combustion-related carbon dioxide, export covered fuels or non-fuel GHGs, use covered fuels as feedstocks, or otherwise destroy non-fuel GHGs. A pilot program for international offset projects would be established to distribute the 3% of annual allowances reserved for offsets. Each year, 1% of the allowances would be made available to entities that reduce or sequester emissions before the initial allocation period, as demonstrated through reports to the EIA’s Voluntary Reporting of Greenhouse Gases Program (1605(b)).
Congressional Review: By January 2015 and every 5 years afterwards, the President would establish an interagency group to review and make recommendations regarding this program and any similar programs underway in China, India, Brazil, Mexico, Russia, Ukraine, or any OECD country. Recommendations may include modifications to the rate of emissions intensity improvement or the rate of safety valve price increases, along with the feasibility of including other non-regulated entities, or modifications to the percentage of allowances auctioned.
Monitoring and Reporting: DOE would establish procedures for reporting and monitoring emissions, and would determine eligibility for credits, offsets and early-reduction allowances.
Penalties: A regulated entity that failed to submit an allowance would pay an amount equal to three times the safety valve price for each allowance not submitted. Failure to comply would bring civil and criminal penalties.
The Act would also create a trust fund to support climate change adaptation and early technology deployment, with provisions for conservation, zero- or low-carbon energy technologies, advanced coal technologies, cellulosic biomass, and advanced vehicles. A subtitle on International Programs would facilitate the deployment of clean energy technologies in developing countries.