On June 26, 2009, the U.S. House of Representatives passed H.R. 2454, otherwise known as the American Clean Energy and Security Act of 2009 or the Waxman-Markey bill. Although significant changes could be made to H.R. 2454 before it clears the Senate and becomes law, the current version of the bill will significantly impact industrial sectors across the United States. Title III of the bill, designated “Reducing Global Warming Pollution,” will likely have the greatest influence in shifting the industrial sector’s behavior away from “business as usual.”
Emissions Regulations and Targets
Title III will compel heavy emitters of greenhouse gasses (GHGs) to reduce their emissions. The list of regulated GHGs include carbon dioxide (CO2), methane (CH4), nitrous oxide (N2O), hydrofluorocarbons (HFCs), perfluorocarbons (PFCs), sulfur hexafluoride (SF6), and nitrogen trifluoride (NF3). The bill will directly regulate electricity generators, natural gas distribution companies, petroleum producers and importers, large industrial businesses (defined as those that qualify for an ITP Energy-Saving Assessment by consuming more than 300 billion Btu annually; e.g., chemical manufacturers, aluminum smelters, carpet and flooring manufacturers, small engine manufacturers, and paper mills) with high emissions (more than 25,000 metric tons per year – equivalent to the annual emissions from the energy consumed in 12,000 homes), and other specific GHG emitters.
Emissions regulations will be facilitated through a cap-and-trade system. The cap-and-trade model provides the total pool of GHG emitters with a set number of credits that corresponds to a certain level of emissions. These credits will be divided among the GHG emitters and are to be used to cover any GHG emissions.
GHG emitters who are able to cost-effectively reduce their emissions, leaving them with extra credits remaining after covering all of their own emissions, will be permitted to sell those extra credits to emitters who were not able to cost-effectively reduce their own GHG emissions and do not have enough credits. There will be a regulated market for these credits that will set the price. GHG emitters who do not have enough credits to cover their emissions will be fined for emissions over the credits possessed. H.R. 2454 seeks to cut national GHG emissions through cap-and-trade to 3 percent below 2005 levels in 2012 and 83 percent below 2005 levels in 2050.
Industrial Sector Allowances
Of the listed GHGs, CO2, an emissions byproduct of burning fossil fuels, will be the most costly to the industrial sector due to the high levels of energy consumption by many industrial businesses. The vast majority of industrial businesses, however, will not be directly regulated. They will instead feel the impact of the bill as CO2-emissions-regulated energy suppliers pass the cost of regulation through to their industrial customers.
Due to the large impact of H.R. 2454 on industrial businesses, Congress built in a relief valve to help the businesses that would be disproportionately hampered by this bill. Crucial energy-intensive and trade-exposed businesses will be given emissions allowances that will help them stay in business during the near-term and provide them with the time needed to update their processes and technologies in order to better cope with GHG regulation. Allowances will be given to businesses within eligible industries based on the amount of goods they produce. These allowances can be sold on the GHG emissions market to cover the cost of higher-priced energy and energy-efficiency upgrades.
One of the most important goals of providing the allowances is to prevent carbon leakage, thus protecting U.S. businesses and jobs from being taken by foreign countries. Carbon leakage occurs when carbon regulations in one region force energy-intensive businesses to move to other regions where there are fewer or no carbon regulations. In addition to forcing businesses from the region, carbon leakage does not reduce global carbon emissions because the same level of emissions is resulting from the businesses’ new locations. Although protecting U.S. businesses and jobs from being forced out of the country is an important goal of providing allowances to energy- and trade-intensive industries, other aims of providing allowances include helping businesses innovate to reduce energy consumption and invest in energy-efficient technologies.
Allowances will be provided to businesses within industrial sectors, given the sector in which they belong meets certain eligibility criteria regarding energy intensity, GHG intensity, and trade intensity. An industry is eligible for allowances if it is proven to be energy- or GHG-intensive and trade intensive. The standard energy- and GHG-intensity threshold for allowances is 5 percent, while the threshold for trade intensity is 15 percent. Additionally, an industry can also qualify for allowances if it has either an energy- or GHG-intensity over 20 percent. See sidebar for information on calculating energy, GHG, and trade intensities.
Table 1 displays information on various industries – specifically, their energy intensity, trade intensity, and whether or not they were eligible for rebate – based upon data from 2007. GHG intensities are not included in this table because of insufficient data.
A list of all eligible industries will be provided to industry no later than June 30, 2011. Additionally, subindustries within ineligible industries will have a chance to prove that they are eligible for allowances. Updates to the list will first occur by February 2013 and then once every four years thereafter. As industries become more or less energy-, GHG-, and trade-intensive, they will be added or removed from the list.
To ensure that industries do not simply maintain their status quo operations in order to remain eligible, the benefits of being on the list begin to decline in 2026. For instance, in 2026, industries will be allocated 90 percent of previous allowances. Each subsequent year, the allocation drops by 10 percent until it bottoms out in 2035. This structure allows businesses the time to improve their energy efficiency and trade vulnerability and to reduce their GHG emissions before fully feeling the impact of legislation.
The next step in the process is for the Senate to hold a hearing for H.R. 2454. On July 7, 2009, the bill was placed on the Senate General Orders calendar as Order Number 97. The final impact on the industrial sector depends on whether or not the Senate passes the bill, and what changes are made to H.R. 2454 if it passes. At this point, the outcome is only up to speculation.
If the bill does pass and looks similar to what was approved by the House of Representatives, there will certainly be significant changes ahead for all U.S. citizens in regard to how energy is produced and consumed. The U.S. industrial sector will also be required to change its operations practices and move toward more efficient uses of energy to stay competitive both domestically and globally. In the near-term, allowances will be made for energy-intensive industries; in the long-term, however, all industries will have to innovate and develop novel solutions to energy-consumption challenges.
· Library of Congress, H.R. 2454: American Clean Energy and Security Act of 2009 (Engrossed as Agreed to or Passed by House), June 2009. www.thomas.gov
· Pew Center on Global Climate Change, At a Glance: American Clean Energy and Security Act of 2009, July 2009. www.pewclimate.org/docUploads/Waxman-Markey-short-summary-revised-June26.pdf.
· Pew Center on Global Climate Change, Distribution of Allowances under the ACES Act, August 2009. www.pewclimate.org/docUploads/policy-memo-allowance-distribution-under-waxman-markey.pdf.
· U.S. Census Bureau, 2007 Economic Census, July 2009. www.census.gov/econ/census07/.
· U.S. International Trade Commission, DataWeb, April 2009. www.dataweb.usitc.gov/.
· U.S. Senate, Calendar of Business, September 9, 2009. www.gpoaccess.gov/calendars/senate/index.html.
Determining Allowance Eligibility
For an industrial sector to be eligible for emissions allowances it must pass either the standard energy-intensity or GHG-intensity test, as well as the trade-intensity test.
Standard Energy-Intensity Test:
Energy Expenditures / Value of Product Shipments ≥ 5%
Standard GHG-Intensity Test:
20 x Tons of CO2-equalivent GHG / Value of Product Shipments ≥ 5%
(Value of Imports + Value of Exports) / (Value of Imports + Value of Product Shipments) ≥ 15%
For highly energy- or GHG-intensive industries, industrial sectors can also qualify for eligibility if either their energy- or GHG-intensity is greater than 20 percent, regardless of their trade intensity