Cap and Trade Bill Stalled in the Senate

Date: August 12, 2009

On June 26, 2009, the U.S. House of Representatives, by a 219-212 vote, passed H.R. 2454, the American Clean Energy and Security Act of 2009. This bill, cosponsored by Rep. Henry Waxman (D-CA), and Rep. Edward Markey (D-MA), establishes, among other things, the system known as "Cap and Trade" by setting minimum allowances for greenhouse gases emissions and establishing derivatives market for trading such allowances.

In addition to the cap and trade component, the House cap and trade bill contains a variety of provisions targeting energy efficiency, many of which provide a direct impact on the real estate sector. One of the most prolific impacts under the bill, is the responsibility imposed on the Department of Energy (DOE) to establish national building energy efficiency targets using baseline standards for commercial buildings and for homes under the American Society of Heating, Refrigerating, and Air-Conditioning Engineers (ASHRAE) Standard 90.1-2004 and the 2006 International Energy Conservation Code (IECC), respectively. These efficiency targets would essentially mimic the energy efficiency requirements that are found in the majority of the third party green building rating systems currently used in the United States. State and local governments would be required to adopt the federal building code or revise their own building codes to meet or exceed the federal regulations within one year of enactment of the federal standards.

Under the bill, new commercial and residential buildings would be required to achieve 30% improvements in energy efficiency above a baseline of 2005 levels. By January 1, 2014, new residential buildings would be required to improve energy efficiency by 50%. Commercial buildings would be required to achieve the same 50% improvement the following year. Additional energy efficiency requirements would continue to fall into place at increments of 5% improvement every three years. The DOE has the authority under the bill to accelerate or lessen these standards on the basis of lifecycle cost analysis.

The bill provides that under the cap and trade system, the sale of carbon allowances would be used to finance building retrofit initiatives to promote energy efficiency. The program, known collectively as the Retrofit for Energy and Environmental Performance (REEP), would be administered by the U.S. Environmental Protection Agency (EPA), in conjunction with the DOE and the U.S. Department of Housing and Urban Development (HUD). It is anticipated that the REEP funds would be passed through states and local governments in order to establish financial assistance accounts, or SEED (State Energy and Environmental Development) accounts, to finance energy efficient retrofit projects.

One of the more noteworthy initiatives under the bill is the creation of a building energy labeling program for new commercial and residential buildings. The energy labeling program would be a joint endeavor by the EPA and the DOE and would require that new commercial and residential buildings make publicly available the information regarding the buildings' energy efficiency, similar to the nutritional information on the side of a cereal box. The thought is that by making this information public, it will incentivize developers and building owners to construct more energy efficient products.

In its current form, the House cap and trade bill contains many additional modifications to current energy and environmental laws. The bill requires power utilities to supply an increasing percentage of energy demand from a combination of energy efficiency savings and renewable energy. The required percentage of total energy demand either saved or generated by renewable energy would begin at 6% in 2012 and gradually increase to 20% by 2021-2039.

In order to accomplish this goal, the bill proposes a "cap and trade" mechanism for the issuing, auctioning, trading, banking, retiring, and verifying of renewable electricity credits, offsets, and allowances. The EPA, the Federal Energy Regulatory Commission (FERC), and the Commodity Futures Trading Commission (CFTC) are empowered under the bill to monitor and promulgate regulations regarding the "cap and trade" system. The EPA is directed to develop regulations to cap and reduce greenhouse gas emissions at 97% of 2005 levels by 2012, 83% by 2020, 58% by 2030, and 17% by 2050. The EPA is required to adopt a national strategy to assist in the development of commercial-scale deployment of carbon capture technology and geological sequestration of carbon. In addition, the EPA would also be called upon to establish a Carbon Storage Research Corporation to collect assessments from fossil-fuel utilities and adopt performance standards for new coal-fired power plants. Finally, the EPA is tasked with distributing emission allowance rebates to eligible industrial sectors based on specified energy, greenhouse gas, or trade intensity criteria.

Under the bill, FERC is required to promulgate regulations for the establishment, operation, and oversight of markets for regulated allowances. Similarly, the CFTC has jurisdiction over the establishment, operations, and oversight of markets for regulated allowance derivatives. The President is called upon by the bill to use existing statutory authority to set new motor vehicle emissions standards and to establish an interagency working group on carbon market oversight. States are prohibited under the bill from implementing their own cap and trade program that covers any of the statutorily-capped emissions emitted during 2012-2017.

A variety of the initiatives under the bill call for Secretary of Energy to implement and oversee various programs which are aimed at promoting energy efficiency and sustainable practices. Among these responsibilities bestowed upon the Secretary of Energy are the following:

  • Establish a large-scale vehicle electrification program as well as a program to provide financial assistance for the manufacture of plug-in electric drive vehicles.
  • Establish Clean Energy Innovation Centers to promote commercial deployment of clean energy alternatives to fossil fuels, reduce greenhouse gas emissions, and ensure that the United States maintains a lead in the development of state-of-the-art energy technologies.
  • Establish programs that encourage businesses and owners of energy generation facilities to become more efficient and/or use renewable energy resources instead of fossil fuels.
  • Promote green jobs through grants to programs of study focused on jobs in renewable energy, energy efficiency, and climate change mitigation.
  • Assist in worker transition by providing adjustment assistance to adversely affected workers.

Finally, the bill would direct the President and the Secretaries of State, Commerce, and Healthy and Human Services to establish various programs and strategies to prepare for and reduce the impact of climate change both domestically and internationally.

On July 7, 2009, the bill was sent to the Senate for consideration. The Senate version of the bill approved by the House, known as the American Clean Energy Leadership Act of 2009 (ACELA), is currently pending before the Senate Committee on Energy and Natural Resources. However, no vote is currently scheduled in the Senate on the ACELA prior to the summer recess. Even assuming Senate passage of the ACELA, it will still have to be reconciled in committee with the house version of the bill. In light of this, it does not appear that the provisions of the bill will be enacted into law, at the earliest, until after the August Congressional recess.