Events such as Hurricanes Katrina, Rita, and Wilma, combined with continued research performed by many of the world’s most respected climate scientists and climate research groups (and even an Academy Award-winning documentary on the subject by former Vice President Al Gore), have elevated the call for Congress to find solutions to address global climate change.
Numerous reports and studies suggest that global climate change is, in fact, occurring and is largely the result of human activity, primarily the burning of fossil fuels.
1 Burning such fuels for the production of heat and energy has drastically increased the concentration of heat-trapping gases, otherwise known as greenhouse gases (“GHGs”), in the atmosphere.
2
The extra energy trapped in the atmosphere increases the global temperature, commonly referred to as the “greenhouse effect.” This phenomenon has the impact of changing the amount and distribution of rainfall; intensifying severe weather such as heat waves, flooding, hurricanes, and typhoons; melting ancient polar ice caps and mountain glaciers; increasing drought, and, consequently, the risk of forest fire and the size of burned areas; and causing sea levels to rise. In the midst of these dangers, a global consensus is developing that the United States should reduce its greenhouse gas emissions by 60 to 80 percent by 2050 to contribute to global efforts to stabilize long-term atmospheric GHG concentrations.
With the Democratic takeover of both chambers of Congress following the
2006 elections, climate change rose to the top of the agenda, with congressional leaders, including House Speaker Nancy Pelosi (D-CA), declaring that passing comprehensive legislation to address climate change is no longer a question of “if,” but rather a question of “how” and “when.” The Senate’s
Democratic leadership has already accepted the primary legislative vehicle to address climate change in the Senate, the Lieberman-Warner
Climate Security Act (S. 2191), introduced in October 2007 by Sens. Joe
Lieberman (I-CT) and John Warner (R-VA). This bill passed out of committee in
December and is expected to be brought to the floor for debate during the first week of June. In the House, the chairman of the Energy and Commerce
Committee, Rep. John Dingell (D-MI), and the chairman of the Committee’s
Energy and Air Quality Subcommittee, Rep. Rick Boucher (D-VA), have announced plans to introduce a companion bill in the coming months.
T he centerpiece of both bills is a “cap-and-trade” program, which begins by creating a limit on the total amount of pollution that can be emitted, also known as a “cap.” The emissions allowed by the cap are divided into permits that give the owner the right to emit certain amounts of pollution into the atmosphere. Over time, the size of the cap is reduced to produce the desired reductions in pollution. The program allows companies that can easily reduce emissions to sell credits to other companies for which such reduction would be difficult, thus creating a market-based approach to regulating GHGs. Capand-trade proposals are touted for providing certainty that the selected level of GHG reductions will occur and economic incentives for industry to find the lowest cost method of achieving the desired emissions reductions.
The concept behind a cap-and-trade system is simple, but the particulars are complex . Lawmakers plan to spend the coming weeks and months crafting climate change legislation that will reach GHG emission reduction goals without having an adverse effect on an already fragile economy. In the process, members of Congress will have to address the concerns of various stakeholders, including industry, environmental groups, organized labor, religious interests, and state and local governments -- many of whom have competing interests. This white paper will summarize the provisions of the
Lieberman-Warner Climate Security Act and the various substantive issues that the bill will likely address, rival legislation introduced in the Senate by Sen.
Jeff Bingaman (D-NM), yet-to-be drafted companion House legislation, and the Bush Administration’s position on cap-and-trade proposals. Additionally, this paper will discuss the timing and prospects of a comprehensive climate change bill in the 110th Congress.
A. The Lieberman-Warner Climate Security Act (S. 2191)
Climate change began receiving serious attention in the Senate after Sen.
Barbara Boxer (D-CA), a staunch supporter of mandatory controls on GHG emissions, assumed the position of Chairwoman of the Senate’s Environment and Public Works Committee at the beginning of the 110th Congress.
3 In
June 2007, the Committee announced its intention to produce a bipartisan bill to address climate change. Senators Lieberman and Warner introduced the Lieberman-Warner Climate Security Act in October 2007. In November, the bill was approved (4-3) by the Subcommittee on Private Sector and
Consumer Solutions to Global Warming and Wildlife Protection of the Senate’s Environment and Public Works Committee and was reported favorably
(11-8) to the full Senate from the Environment and Public Works Committee on December 5. The vote split largely along party lines, with all of the panel’s
Democrats and Independents voting for the bill and all but one of the panel’s Republicans (Sen. Warner) voting against it. There are currently 11 cosponsors of the bill, four of whom are Republicans.
4
1. The Substance
Based on objectives determined by the November 2007 report of the
Nobel-prize winning United Nations Intergovernmental Panel on Climate
Change (“IPCC”), the bill is specifically designed to reduce total U.S. emissions levels in 2050 to 62 to 66 percent below the 2005 emissions level to reverse the impacts of global climate change while simultaneously preserving robust economic growth.
5 At the core of the bill is a cap-andtrade program that would place a declining cap on U.S. emissions of the six primary GHGs.
6 Under the program, coal-burning power plants and industries, natural-gas processing plants and importers, petroleum- or coal-based producers and importers, and facilities that produce or import
(for sale) GHGs, collectively referred to as “covered entities,” would be required to gradually reduce their GHG emissions to comply with the declining cap.
At the inception of the program, the Environmental Protection Agency
(“EPA”) would create all of the emission allowances, which are limited authorizations by the government that would permit holders to emit one ton of pollutant. At the beginning of each calendar year starting in
2012, the EPA would divide and distribute at no charge a percentage of each year’s account to covered facilities within the electric power and industrial sectors based on their historic emissions. The percentages would decrease to zero by 2031.
At the end of each calendar year beginning in 2012 until 2050, each owner or operator of a covered facility would submit to EPA a number of emission allowances that equals the number of CO2 equivalents of
GHG emitted by that covered facility in the preceding year.
7 The owner or operator of any covered facility that fails for any year to submit one or more emission allowances would be liable for the payment of an excess
Addressing Climate Change in the 110th Congress 2

emissions penalty. Essentially, by placing a price on carbon emissions, the bill aims to spur the development and deployment of zero-to-low-carbon emitting energy sources, like solar and wind power and other renewable and “clean” energy sources. To meet each year’s compliance obligation, entities would be able to buy additional allowances from auction, use banked allowances saved from previous years, purchase certified offsets, 8 or reduce their GHG emissions.
Under the bill, some 19 percent of the total emissions budget would be distributed free to nonregulated entities as incentives for those entities to reduce GHG emissions or sequester carbon dioxide, even though they are not regulated by the bill. Covered facilities would be able to purchase extra allowances from nonregulated entities that have received allowances. For instance, S. 2191 would guarantee that 4.5 percent of the emission allowance account be directed to states, which then must use
90 percent (of the revenue gained by selling their allowances to covered facilities that need to meet their yearly compliance obligation) for a list of eligible activities, including promoting energy efficiency, improving public transportation, and relocating communities displaced by the impacts of climate change.
To cover its emissions if the number of free allowances allocated to it is not sufficient, a covered entity may purchase additional allowances from the Climate Change Credit Corporation, a non-federal 501(c)(3) entity established by the bill. The percentage of allowances to be auctioned off increases during the life of the program. Thus, as technology and methods for reducing GHG emissions are developed, it will become even more costly to emit GHGs. Funds generated from the sale of allowances will depend on the allowance price. The drafters of the bill estimate that in the program’s first 18 years, the auction may cumulatively generate $1 trillion in funds. The funds would be used to support a range of activities, including development of zero-to-low-carbon energy technology, workforce training, assistance for low-income and rural communities impacted by climate change, wildlife conservation, and the development of climate change adaptation plans to support developing countries.
The bill would also establish the Carbon Market Efficiency Board, comprised of seven members appointed by the President whose primary objective would be to observe the allowance market and implement costrelief measures, if necessary, to avoid significant harm to the economy.
The board would have the authority to temporarily increase the amount that covered entities may borrow, lengthen the payback period of loans, lower the interest rate on loans, and/or loosen a given year’s economywide emissions cap by as much as five percent, provided that subsequent years’ caps are tightened sufficiently to ensure that the cumulative emissions reductions over the long term remain unchanged.
The bill would also direct the executive branch to intensify its efforts to convince other nations to start reducing their GHG emissions. If eight years after the enactment of the cap-and-trade program it is determined that a major emitting nation has not taken comparable action to reduce its GHG emissions, the President would be authorized to require that manufacturers of GHG-intensive products, such as steel and aluminum, imported from that nation submit emissions credits of a value equivalent to that of the credits that the U.S. system effectively requires of domestic manufacturers.
One key provision in S. 2191 would make clear that states are not preempted from enacting and enforcing GHG emission reduction requirements that are more stringent than the federal ones. Additionally, S. 2191 would direct the Secretary of Energy to create regulations to implement a national infrastructure for taking CO2 from power plants, through pipelines, to injection wells, and then deep underground to remove it from the atmosphere. The bill would also require annual review of foreign countries’ GHG control actions in 2018. Finally, the bill would authorize the President to suspend provisions of the bill in the event of a national emergency.
A more detailed summary of the bill is included as Appendix A .
2. Timing and Prospects
Senate Majority Leader Harry Reid (D-NV), having stated that the capand-trade bill is the most important issue left before the Senate this year, has indicated that floor debate will occur in the first week of June, after the
Senate returns from its Memorial Day recess. He has promised to provide ample time for floor debate if the bill can get the 60 votes needed to proceed. The bill is expected to draw much of its support from Democrats, but supporters acknowledge that they will have to attract additional Republicans and several coal-state Democrats tions that desire steep cuts in emissions.
9 without weakening the bill to the point that it loses the support of senators and environmental organiza-
Senator James Inhofe (R-OK), ranking member of the Environment and
Public Works Committee and perhaps the most vocal opponent of the legislation, released a white paper in May that discusses what he asserts are the burdensomely high economic costs of the Lieberman-Warner bill.
10
In his paper, he states that the bill would negatively impact the national and local economies, cause the loss of millions of American jobs, and raise the price of heating and electricity for consumers. He also states that the proposed cap-and-trade system relies on the faulty assumption that the technology necessary to reduce GHGs can be developed, adopted, and implemented earlier than is realistically possible, thereby forcing businesses to unwisely invest in questionable technology.
Many of the bill’s supporters believe there may be too many obstacles to overcome to get the bill passed through the Senate this year, not the least of which is the cloture vote needed to end the threat of a filibuster – not to mention a presidential veto. While Democrats control the Senate 51-49, 11 the bill would need 60 votes to cut off Senate debate and bring the measure to a vote. Thus, the measure will need the support of roughly 10 to 12
Republicans to offset possible Democratic defections and still obtain the required 60 votes needed to end a filibuster. Cap-and-trade supporters will likely look to several other Republicans who voted for similar proposals in 2003 and 2005 offered by Sen. Lieberman and Sen. John McCain
(R-AZ) as amendments to legislation on the Senate floor.
Senate aides have predicted that between a dozen to 150 amendments will be proposed to the Senate bill. Senator Boxer, with the support of
Sen. Reid, has announced her intention to pull the bill if it is in danger of being weakened by opponents’ amendments.
3. The Debate
To bolster support for the bill, the leadership will have to make the bill palatable to environmental, industry, labor, and religious groups and state and local governments, and the House and Senate allies of those groups.
Working out such a compromise will be difficult. Discussions between congressional staff and these interested parties are expected to intensify over the coming weeks. Of the many issues that will arise as the final bill is being worked out, the following issues will likely receive the most attention: a. Target Emission Reduction Levels
Some Democratic senators may try to set the bill’s long-term target closer to an 80 percent emissions reduction by 2050, instead of the
62 to 66 percent target for total U.S. emissions in the current version, to reflect the emerging scientific consensus that the United States needs to reduce its total emissions by 80 percent by 2050. Other senators contend that reaching the existing 62 to 66 percent target included in the bill will be unduly burdensome for industry.
Addressing Climate Change in the 110th Congress 3

b. Allocation of Allowances
In response to industry groups, the drafters of the legislation will have to determine how to balance the allocation of emission allowances to various industries and determine whether certain sectors should be exempt from having to hold or purchase emission allowances at all. To serve as an incentive for emissions reductions, environmental groups propose increasing the percentage of emission allowances that the government sells at an auction, rather than giving them to industry for free. They propose using the revenue to promote clean energy sources, aid low-income consumers, and provide unemployment relief. On the other hand, several industry groups are pushing for a greater percentage of the allowances to be free to help them meet their compliance obligation at a lower cost. c. Cost Containment
Many stakeholders believe that cost containment measures are needed to guard against excessively high and volatile allowance prices.
12
The need for explicit cost containment measures will be especially important during the initial years of a cap-and-trade program when low-carbon technologies are still being developed and are not yet available to help these companies reduce their
GHG emissions.
Environmental groups have generally opposed limiting the annual rise in prices for emission allowances as a means to ease cost concerns, arguing that higher carbon prices would likely be needed to force carbon-intensive industries to adopt new technologies to reduce their emissions.
The bill does not currently include a safety valve that would limit the annual rise in the price of emissions credits. Instead, S. 2191 would rely on the presidentially-appointed Carbon Market Efficiency Board, which would be authorized to halt escalating carbon prices, to ease economic impacts, although those caps eventually would have to tighten in future years to ensure that the overall 2050 reduction targets are met.
d. Federal Preemption
A tough issue in the debate will be whether federal legislation should preempt existing efforts by state and local governments to curb emissions.
13 The bill currently would give deference to states that will provide stronger emissions controls that go above and beyond the federal cap-and-trade legislation; however, many industries argue that having separate state approaches would raise compliance costs and translate into higher costs for consumer goods and energy. e. Global Initiatives
To encourage other nations to begin reducing their GHG emissions,
S. 2191 would essentially impose trade restrictions on countries that refuse to take actions comparable to those taken in the United States, which reflects the belief that developing nations must contribute to the effort to combat global climate change. Supporters of this provision also argue that it would help ensure that U.S. cap-and-trade legislation does not harm U.S. competitiveness or result in jobs moving overseas.
To the contrary, others argue that this measure is akin to a unilateral trade restriction and could prompt retaliation from trading partners. An alternative suggestion has been to set performance standards on all energy-intensive goods sold in the United States, whether they are foreign or domestic. Another option would be to offer “carrots and sticks” to developing countries, including giving countries that swiftly adopt emissions caps more generous access to the carbon trading market. Although disagreements exist among stakeholders, most observers agree that Congress cannot pass a bill that does not address reducing emissions in developing countries.
f. Nuclear Power
Some Republican lawmakers and nuclear power advocates complain that the bill does not include explicit language supporting the extensive buildup of new nuclear plants (which do not emit greenhouse gases) that they say will be needed if the United States has any hopes of significantly cutting emissions by mid-century. Many environmental groups object to the building of nuclear plants, citing the potential risks of nuclear plants and the difficulty of disposing of the high-level radioactive waste they produce. Warner has stated that there will most certainly be a place for nuclear power incentives in the bill, even if those incentives are included by amendment. (See discussion below regarding
Lieberman-Warner amendment to include nuclear subtitle.)
4. The Substitute Amendment
On May 21, Sens. Boxer, Warner, and Lieberman released a 157-page plan to reduce GHGs through a cap-and-trade proposal as a substitute to S. 2191. While the target emissions reductions goals remain the same, this substitute amendment includes changes intended to make the legislation more politically attractive to coal-state senators, manufacturers, and other stakeholders so that the legislation may secure the 60 votes needed to overcome a likely filibuster. However, observers have noted that the substitute amendment calls attention to the complexity of a cap-and-trade program and the degree to which competing stakeholders will be advantaged or disadvantaged by any cap-and-trade proposal.
The revised bill includes several new provisions aimed at cost containment, one of the central controversies of the bill.
While the proposal does not establish a safety valve, it would establish an “emergency offramp,” whereby additional allowances would be released into the market if the costs of allowances rise above a certain price range. The additional allowances would be paid back in the future so that the emissions cap remains the same over the long term.
An estimated $955 billion from the auctioned allowances would be directed to the Treasury to make the bill “deficit-neutral.” This language was added to garner the support of fiscally conservative Democrats. The bill also adds language granting the President the discretion to modify the emission goals included in the bill in order to prevent economic harm and to accurately account for the time needed to develop new technologies to reduce emissions.
The substitute amendment also includes approximately $250 billion in free allowances to coal-reliant states; $300 billion in free allowances to be distributed to power plants fueled by coal and other fossil fuels; $800 billion for a “tax relief fund” to help consumers meet higher energy costs;
$900 billion for electricity and gas utilities to pass on as rebates to their customers; specified dollar amounts targeted to a variety of industries to help them transition to the bill’s emission reduction goals; and specified dollar amounts for a variety of programs, including agriculture and forestry, transit, worker training, efficient and renewable energy, carbon sequestration, and wildlife conservation programs.
Shortly after releasing the substitute amendment, Sens. Warner and Lieberman drafted a subtitle for the bill that would recognize nuclear power as an energy source that does not emit GHGs and that can be safely operated. The subtitle, which Lieberman and Warner will likely offer as an amendment, also recognizes that nuclear power plant construction and the manufacturing of nuclear components will create new American jobs.
In addition to establishing a nuclear title in the bill, the Lieberman-Warner amendment would aim to increase the number of nuclear engineers and improve the financing and purchasing of equipment. Chairwoman Boxer has not favored including language that would single out nuclear energy, although she has suggested that she, Lieberman, and Warner might be able to agree on an appropriate amendment. This amendment will likely open the door for the consideration of a myriad of other nuclear energy amendments.
Addressing Climate Change in the 110th Congress 4

The timing of the release of the substitute, just days before senators adjourn for the Memorial Day recess, will provide senators with only two weeks to evaluate the new proposal before it goes to the floor along with
S. 2191 in the first week of June.
B. Bingaman-Specter “Low Carbon Economy Act” of 2007
(S. 1766)
Senate Energy and Natural Resources Chairman Bingaman and Sen.
Arlen Specter (R-PA) introduced rival legislation, the Low Carbon
Economy Act of 2007, in July 2007. The bill currently has six cosponsors
(three Democrats and three Republicans). While this bill has not been marked up, it is viewed as a moderate alternative to the Lieberman-
Warner bill. It is possible that, at some point, Sens. Warner, Lieberman,
Bingaman, and Specter will try to resolve their differences and agree on a single legislative vehicle.
While both bills establish a cap-and-trade program, provide incentives for carbon capture and the development of zero-to-low-carbon emitting technology, and include emissions reduction requirements on foreign trading partners, the bills’ biggest differences center on their emission reduction targets and cost containment measures. The Bingaman bill aims to reduce emissions by covered entities by 60 percent from current levels by 2050, compared to the 70 percent goal for emissions by covered entities in the Lieberman-Warner bill, 14 and unlike the Lieberman-
Warner bill, which established a Carbon Market Efficiency Board to prevent market volatility and limit compliance costs for utilities and other industrial polluters, S. 1766 would set a $12-per-ton limit on how high the price of emissions credits can rise.
This cost containment measure, referred to as a “safety valve,” would limit the price of emission allowances that businesses would buy and sell to comply with the bill.
This bill was designed to draw the support of industry and organized labor, and has gained the backing of several electric utilities, the American Federation of Labor and Congress of Industrial Organizations, and the United Auto Workers. However, environmentalists have staunchly opposed the safety valve provision which, they argue, would provide a disincentive for covered entities to invest in zero-to-low- carbon technology.
House progress on its own cap-and-trade legislation has been slower. This is in part due to negotiations on federal energy legislation, H.R. 6, the Energy
Independence and Security Act (“EISA”), 15 which consumed the Energy and
Commerce Committee staff for much of the fall of 2007. Now that H.R. 6 has become law, the chairman of the Energy and Commerce Committee, Rep.
Dingell, and the chairman of the Committee’s Energy and Air Quality Subcommittee, Rep. Boucher, have announced their goal of passing a mandatory, economy-wide, cap-and-trade bill in the House, bringing it to conference with the Senate’s bill, and presenting it to President Bush for his signature by the end of this year. Dingell and Boucher have not yet set a date for the bill’s introduction, and this November’s elections present a relatively short timetable, as the congressional pace tends to slow down as Members begin to focus on the campaign trail. Dingell has stated that the bill will have to be on the House floor by the summer to get through Congress this year.
Drafting EISA included the input of nearly a dozen committees; however, this year’s global warming legislation will likely reside solely under the jurisdiction of the Energy and Commerce Committee. The bill would begin in Boucher’s subcommittee before going to the full committee and then the House floor.
Speaker Pelosi, Select Committee on Energy Independence and Global
Warming Chairman Ed Markey (D-MA), and House Oversight and
Government Reform Committee Chairman Henry Waxman (D-CA) are expected to further shape any legislation that the Energy and Commerce
Committee produces.
In 2007, the Energy and Air Quality Subcommittee held more than a dozen climate change hearings. Based on those hearings, Representatives Dingell and Boucher have concluded that the United States needs to reduce its
GHG emissions by 60 to 80 percent by 2050 to contribute to global efforts to address climate change, and an economy-wide cap-and-trade program will provide the most effective arsenal.
Before Dingell and Boucher draft the bill, the Energy and Commerce Committee plans to release a series of global warming white papers intended to address issues raised by federal cap-and-trade legislation and will request comments on each of them. The first three papers have focused on determining the basic design and key principles of a cap-and-trade system, how to engage developing nations in the effort to reduce GHG emissions, and whether states should have the authority to regulate GHG emissions or be preempted from doing so by federal regulations. Subsequent white papers will address other topics, including but not limited to: cap levels; cost containment mechanisms; carbon sequestration; offsets and credits; and the distribution of emissions allowances. The Committee intends to hold hearings on several of the topics raised by the white papers.
A. The Substance
In crafting a federal cap-and-trade program, the Committee has recognized, in its first white paper, “Scope of a Cap-and-Trade Program,” 16 that there are practical limits to the number and type of entities that can be directly regulated by a cap-and-trade program due to the inability to determine emissions from sources within certain sectors and the fact that some sectors, like the residential sector, have a large number of sources that each have low emissions, which could render their direct coverage administratively untenable. The paper notes that building codes and efficiency or other performance standards might be appropriate in addition to or instead of including certain sectors in the cap-and- trade program.
As of now, the Committee plans to cover electricity generating facilities, refineries, and importers of transportation fuel. The Committee is considering including some facilities in the industrial sector, but is looking for additional information on the types of emissions, the activities that produce them, and the types of facilities to determine the appropriate point of regulation and threshold for coverage. The Committee is also considering how to treat the commercial sector in a cap-and-trade program given that, for some commercial buildings, the point of regulation is downstream (i.e., the emitters) and, for other commercial buildings, the point of regulation is upstream or midstream (i.e., fuel producers, processors, or providers).
17
In addition to proposing a cap-and-trade program, the Committee’s second white paper, “Competitiveness Concerns/Engaging Developing Countries,” proposes provisions encouraging developing countries, such as China and India, to reduce emissions to contribute to the solution.
18 The Committee notes that limiting GHG emissions in the United
States and other developed countries is not sufficient to curb the harmful effects of climate change unless key developing countries also control their GHG emissions. The Committee also states that if the United States caps its own GHG emissions without corresponding action by competing developing nations, American jobs and industry may relocate to those countries where production is cheaper, thereby harming the
American economy.
19
Dingell has cautioned that the trade-related provisions must be crafted in a manner that is reasonably certain to withstand a challenge before the World Trade Organization (“WTO”), the international body that acts to reduce trade barriers.
20 Even if cap-and-trade supporters are able to draft WTO-compliant provisions to protect U.S. industries from other nations that avoid emissions limits, Dingell has acknowledged that they cannot prevent developing nations from retaliating with tariffs and other actions against U.S. goods.
Addressing Climate Change in the 110th Congress 5

The Committee is currently considering three broad categories of approaches to encouraging developing countries to reduce their emissions: (1) requiring foreign goods imported into the United States to be accompanied by emissions allowances; (2) establishing performance standards on energy-intensive goods (i.e., iron, steel, aluminum, and paper) sold in the United States; and (3) imposing emission reduction conditions on other countries that wish to access and participate in the carbon market established in the bill.
21
The House bill will also have to address federal preemption, which
Dingell has stated may be necessary to prevent industry from having to comply with multiple regulations and from driving industry and jobs to states with lower environmental standards. In fact, Dingell told reporters, following a speech at the Energy Information Administration’s annual conference in Washington, that allowing the EPA to issue rules that require states to outline in detail how their local industries should reduce
GHGs is “a glorious mess.” 22 While Dingell believes that a national cap-and-trade program designed by Congress is essential to curbing emissions, he believes there also may be a role that states and local governments could play in making a national cap-and-trade program more efficient.
For instance, the Energy and Commerce Committee’s third white paper,
“Appropriate Roles for Different Levels of Government,” suggests that states could play a role in monitoring and keeping records of compliance with the program, and this would be more efficient than only assigning federal inspectors to do so.
23 Further, the Committee proposes that reducing GHG emissions requires a variety of tools, not simply a national, economy-wide cap-and-trade program. Other tools that could be used include appliance efficiency standards, building codes, land use decisions, performance standards, public transit, and incentives to increase efficiency.
local governments.
24 Committee staff contend that many of these tools may be more effective and appropriate in the hands of state and
B. Timing and Prospect s
The ideological diversity within the Democratic Caucus makes coming up with legislation that satisfies all sides a significant challenge. Dingell, whose district is located in southeast Michigan, which has historically been the hub of the U.S. automotive industry, and Boucher, who represents major coal producers in southwestern Virginia, are generally less inclined to support aggressive climate change legislation that will adversely affect these industries compared to Speaker Pelosi and many others in the House Democratic Caucus. Observers are skeptical that a bill will pass the House this year, but if supporters can bring the measure to a vote before Dingell’s committee, it may represent significant progress toward eventual passage in 2009.
President Bush, who has long opposed mandatory emissions reductions requirements, announced, in an April 2008 Rose Garden address delivered on the subject of climate change, a goal of halting the growth of GHGs by
2025, when, he says, they will peak, but he has stopped short of specific legislative proposals to mandate carbon emissions caps.
To reach this goal, the administration strongly favors technology incentive programs as opposed to mandatory emissions caps. President Bush has argued that for a cap-and-trade program to be effective, the reductions targets must be consistent with advances in technology. He said, “The wrong way is to . . . demand sudden and drastic emissions cuts that have no chance of being realized and every chance of hurting our economy.” 25 He has said that incentives to make the commercialization and use of new, lower emission technologies more competitive should be weighted to make lower emission power sources less expensive relative to higher emission sources. He also asserted that incentives should be technology-neutral to prevent the government from favoring participants in this emerging market.
President Bush has suggested that he may support a cap-and-trade program that solely covers power plants, but he has not supported any of the existing legislative proposals.
With very few major bills left on the congressional agenda for this session, passing comprehensive climate change legislation will be a top priority in the coming months. Chairman Boucher had stated in March that climate change legislation has about a “50-50” chance of becoming law this year. The odds at this point are now even less. Those chances jump to at least 80 percent in the next Congress because all three remaining major presidential contenders, Sens. Barack Obama (D-IL), Hillary Clinton
(D-NY), and McCain support cap-and-trade legislation, and the Democratic majority is expected to gain seats in both the House and Senate.
26
While several congressional observers argue that President Bush might compromise in the face of a congressionally-approved bill in the hopes of staving off an even more stringent bill from the next president, the administration’s formal position on mandatory reductions is unchanged. Some Republicans and businesses believe that it is better to tackle the issue with President Bush in office rather than risk facing a new administration that will be more aggressive in curbing GHGs. On the other hand, faced with a good chance that
Bush will veto the bill in 2008 or only sign a pared-down version of the bill, the House leadership may decide to wait for a change in the presidency in
2009 in hopes of getting an even stronger bill.
Boucher has stated that passing the bill this year will give industry the certainty necessary to invest in new coal-powered electricity plants, which take years and hundreds of millions of dollars to build, and the certainty to more broadly create a new “green economy” that will provide jobs and other benefits that outweigh the costs of cap-and-trade legislation. Observers also note that it may be important to finish a plan before international discussions begin in Copenhagen in December 2009 on a follow-up treaty to the current
Kyoto Protocol.
27
At stake, too, are incumbents’ prospects in the November elections. Some believe that Democrats will benefit in the November elections by forcing a vote on a cap-and-trade bill this year while others fear that a vote may harm their election prospects, especially if voters believe that such legislation would negatively affect already volatile fuel prices or harm the economy. Still others argue that there are no guarantees that global warming legislation will get passed next year, with the economy, Iraq, and health care likely to take top billing in a new administration.
As of this writing, it is unlikely that significant legislation addressing climate change will be enacted this year. However, the current legislative proposals lay the foundation and frame the debate for enactment of a comprehensive climate change bill in the next Congress. Indeed, the last bill under consideration by Congress this year will probably become the starting point for next year’s climate change debate. Efforts to help shape this year’s cap-and-trade proposals may dictate the specific legislation that Congress will consider next year. Therefore, engaging this year in the climate change legislative debate could be beneficial in terms of affecting the outcome in the next Congress.
Addressing Climate Change in the 110th Congress 6

The Cap-and-Trade Program
The purpose of S. 2191 is to establish a federal program that will substantially reduce GHG emissions before 2050 to reverse the impacts of global climate change while simultaneously preserving robust economic growth. Based on objectives determined by the November 2007 report of the Nobel-prize winning United Nations Intergovernmental Panel on Climate Change (“IPCC”), the bill is specifically designed to reduce U.S. emissions levels in 2050 to
62 to 66 percent below the 2005 emissions level.
28 At the core of the bill is a cap-and-trade program that would place a declining cap on the U.S. emissions of the six primary GHGs.
29 Under the program, coal-burning power plants and industries, natural-gas processing plants and importers, petroleum- or coal-based producers and importers, and facilities that produce or import
(for sale) GHGs, otherwise known as “covered entities,” would be required to gradually reduce their GHG emissions to comply with the declining cap.
At the inception of the program, the Environmental Protection Agency (“EPA”) would create all of the emission allowances -- limited authorizations by the government that permit the holders to emit one ton of pollutant -- that would exist over the entire 38-year life of the program.
30 For each calendar year from 2012 through 2050, the EPA would set the number of emission allowances issued for each year. The size of the 2012 Emission Allowance Account (“EAA”) would be 5.775 billion allowances. The number of allowances in a given year’s account would be 106 million fewer than the number in the immediately preceding year’s account. Under the bill, in 2050, the size of the
EAA would be 1.732 billion allowances; that would be 70 percent below the number of CO2 equivalent 31 GHG emissions by covered facilities in 2005.
32
Covered Entities
At the beginning of each calendar year starting in 2012, the EPA would divide and distribute at no charge a percentage of each year’s account to covered facilities within the electric power and industrial sectors based on their historic emissions. The percentage of the EAA to fossil fuel-fired electric power generating facilities would begin at 19 percent in 2012; rural electric cooperatives would begin at 20 percent; energy intensive manufacturing facilities would begin at 10 percent; importers and producers of petroleum-based fuel would begin at two percent; and hydrofluorocarbon producers would begin at two percent. The percentages would decrease to zero by 2031.
At the end of each calendar year beginning in 2012 until 2050, each owner or operator of a covered facility would submit to EPA a number of emission allowances that equals the number of CO2 equivalents of GHG emitted by a covered facility in the preceding year.
33 The owner or operator of any covered facility that fails for any year to submit one or more emission allowances would be liable for the payment of an excess emissions penalty, the amount of which would be equal to the greater of $200 or three times the mean market value of an emission allowance during the calendar year for which the emission allowances were due. Essentially, by placing a price on carbon emissions, the bill aims to spur the development and deployment of zero-to-low-carbon emitting energy sources, like solar and wind power and other renewable and “clean” energy sources.
To meet each year’s compliance obligation, entities would be able to buy additional allowances from auction, use banked allowances saved from previous years, purchase certified offsets, 34 or reduce their GHG emissions.
Specifically, S. 2191 would allow owners and operators of covered facilities to:
•Holdontoor“bank”allowancesaslongastheywishtomaintaintheir own reserve of allowances use in future years.
•Satisfyupto15percentofagivenyear’scomplianceobligationwith allowances borrowed from future years. A 10 percent interest rate and a five-year limit would be placed on each loan.
•Satisfyupto15percentofagivenyear’scomplianceobligationwith offset allowances generated within the U.S.
•Satisfyupto15percentofagivenyear’scomplianceobligationwith international allowances, allowances purchased from a foreign GHG emissions trading market that EPA certifies as having comparable integrity to the U.S. market and that exists by virtue of national emissions caps that EPA finds to be of comparable stringency to the caps established by S. 2191.
Non-Covered Entities
Under the bill, some 19 percent of the total emissions budget would be distributed for free to nonregulated entities (five percent to U.S. farmers and foresters, 2.5 percent for international forest protection, one percent to coal mines and landfills, and 10.5 percent to state governments) as incentives for those entities to reduce GHG emissions or sequester carbon dioxide, even though they are not regulated by the bill. Covered facilities would be able to purchase extra allowances from nonregulated entities that have received allowances. For instance, S. 2191 would guarantee that 4.5 percent of the emission allowance account be directed to states, which then must use 90 percent (of the revenue gained by selling their allowances to covered facilities that need to meet their yearly compliance obligation) for a list of eligible activities, including promoting energy efficiency, improving public transportation, and relocating communities displaced by the impacts of climate change.
The list of eligible activities is broad and is meant to allow states to best address their regional concerns and impacts. States would be able to also access another five percent of the emission allowance account if they adopt climate-friendly policies, such as green building standards. The bill would similarly reward farmers and foresters that adopt practices that increase the storage of CO2 in plants and soils.
Cap-and-trade legislation would not directly raise taxes, but it could increase electricity and gas prices by forcing industry to pay the cost of lowering emissions. These costs are expected to be passed on to consumers. To offset costs of the program to consumers, the bill would direct the EPA each year to allocate nine percent of that year’s account to utilities that have a regulatory or contractual obligation to deliver electricity to retail consumers and two percent of that year’s account to the natural gas local distribution companies that have a regulatory or contractual obligation to deliver natural gas to retail consumers. The revenue gained by selling these allowances to covered facilities would be used to mitigate economic impacts on low- and middle-income energy consumers and to promote energy efficiency on the part of energy consumers. By providing allowances to non-covered entities, the bill intends to further the goal of reducing GHG emissions while encouraging a fluid trading market by including a large number of participants.
Auctioning Allowances
The bill directs the EPA to allocate portions of each year’s EAA to the Climate
Change Credit Corporation, a non-federal 501(c)(3) entity established by the bill that is comprised of five individuals appointed by the President, for annual auctioning. A covered entity may purchase additional allowances to cover its emissions if the number of free allowances allocated to it is not sufficient. The percentage of allowances to be auctioned off increases during the life of the program. The portion in 2012 is 21.5 percent, and the portion rises steadily each year and then plateaus at 69.5 percent from 2031 through 2050. Thus, as technology and methods for reducing GHG emissions are developed, it will become even more costly to emit GHGs. In 2012, an additional five percent will be allocated for early auctioning; these allowances will be allocated to owners and operators of covered facilities as a reward for actions taken since January 1994 to reduce GHGs. Funds generated from the sale of allowances will depend on the allowance price. The drafters of the bill estimate that in the program’s first 18 years, the auction may cumulatively generate
$1 trillion in funds.
The bill would establish six funds within the Treasury Department and donate a set percentage of the revenue per fund: Technology Deployment Fund (52
Addressing Climate Change in the 110th Congress 7

percent); Low Income Energy Consumers Fund (18 percent); Wildlife Adaptation Fund (18 percent); International Adaptation and National Security Fund
(five percent); Workforce Training Fund (five percent); and Advanced Energy
Research Fund (two percent). These funds would be distributed to these programs to fund a range of activities including development of zero-to-lowcarbon energy technology, workforce training, assistance for low-income and rural communities impacted by climate change, wildlife conservation, and the development of climate change adaptation plans to support developing countries.
Carbon Market Efficiency Board
The bill would establish the Carbon Market Efficiency Board, comprised of seven members appointed by the President whose primary objective would be to observe the allowance market and implement cost-relief measures, if necessary, to avoid significant harm to the economy. The board would have the authority to temporarily increase the amount that covered entities may borrow, lengthen the payback period of loans, lower the interest rate on loans, and/or loosen a given year’s economy-wide emissions cap by as much as five percent, provided that subsequent years’ caps are tightened sufficiently to ensure that the cumulative emissions reductions over the long term remain unchanged.
Encouraging the Global Effort
The bill would also direct the executive branch to intensify its efforts to convince other nations to start reducing their GHG emissions. If eight years after the enactment of the cap-and-trade program it is determined that a major emitting nation has not taken comparable action to reduce its GHG emissions, the
President would be authorized to require that manufacturers of GHG-intensive products, such as steel and aluminum, imported from that nation submit emissions credits of a value equivalent to that of the credits that the U.S. system effectively requires of domestic manufacturers.
Miscellaneous Provisions
One key provision in S. 2191 would make clear that states are not preempted from enacting and enforcing GHG emission reduction requirements that are at least as stringent as the federal ones. The bill would also require strengthened energy efficiency standards for residential boilers, space heaters, and air conditioners in 2012 and would also provide for new model building efficiency standards by 2010 and a new low-carbon fuel performance standard for the transportation sector beginning in 2011. The bill would direct the commission of reports from EPA and the National Academy of Sciences that would include the latest scientific information and data related to climate change, describe the bill’s performance and other policies in reducing GHG emissions, and make policy recommendations to Congress based on these findings. Additionally, S. 2191 would direct the President to submit to Congress in 2020 a bill based on recommendations by EPA in 2019. he bill would also direct the Secretary of Energy to create regulations to implement a national infrastructure for taking CO2 from power plants, through pipelines, to injection wells, and then deep underground to remove it from the atmosphere, and the bill would require annual review of foreign countries’
GHG control actions in 2018. Finally, the bill would authorize the President to suspend provisions of the bill in the event of a national emergency.
__________________________________________________________
1 Fossil fuels are nonrenewable energy sources such as coal, petroleum, or natural gas, or any fuel derived from them.
2 See, e.g., Lenny Bernstein, et al., Climate Change 2007: Synthesis Report, FOURTH
ASSESSMENT REPORT INTERGOVERNMENTAL PANEL ON CLIMATE CHANGE
WORKING GROUP 1 (2007). The most recent report from the IPCC, which represents the work of more than 1,200 scientists, concluded that evidence of global warming is now “unequivocal,” and that it is more than 90 percent likely caused by human activities. See also, Leon E. Clarke, James A. Edmonds, Hugh M. Pitcher & Richard G.
Richels, Scenarios of Greenhouse Gas Emissions and Atmospheric Concentrations,
PRODUCT 2.1, PART A, UNITED STATES CLIMATE CHANGE SCIENCE
PROGRAM (2007).
3 F ormer Chairman of the Senate Committee on Environment and Public Works and current ranking Republican James M. Inhofe of Oklahoma has been a vocal skeptic of the idea of man-made climate change. He has opposed setting mandatory limits on GHG emissions on the grounds that doing so would harm the economy and drive up energy prices.
4 The Act’s bipartisan cosponsors are Sens. Ben Cardin (D-MD), Bob Casey (D-PA),
Norm Coleman (R-MN), Susan Collins (R-ME), Elizabeth Dole (R-NC), Tom Harkin
(D-IA), Amy Klobuchar (D-MN), Bill Nelson (D-FL), Charles Schumer (D-NY), John
Warner (R-VA), and Ron Wyden (D-OR).
5 According to the fourth Assessment Report of the IPCC, stabilizing greenhouse gas concentrations in the atmosphere at a level that will prevent dangerous interference with the climate system will require a global effort to reduce anthropogenic GHG emissions worldwide by 50 to 85 percent below 2000 levels by 2050. The IPCC is organized under the auspices of the United Nations and engages the participation of more than 2,000 scientists from all around the world. The IPCC was established to provide decision-makers and others interested in climate change with an objective source of information about climate change.
6 The six major greenhouse gases are carbon dioxide (CO oxide (N
2 hexafluoride (SF
6
).
2
); methane (CH
4
); nitrous
O); hydrofluorocarbons (HFCs); perfluorocarbons (PFCs); and sulfur
7 It should be noted that, under the bill, owners or operators of covered facilities using coal are allowed to discount from their submission requirement the number of metric tons of CO
2
that they geologically sequester. Owners or operators of other types of covered facilities are not allowed to perform such discounting. Instead they receive an emission allowance back from EPA for each metric ton of CO
2
that they geologically sequester, destroy, or use as feedstock in a manner that prevents its release into the atmosphere.
8 Offset allowances come into being when EPA certifies that a non-covered facility has done something that either has reduced the number of CO
2
equivalents that the facility otherwise would have emitted in that calendar year or has increased the number of CO
2
equivalents that the facility otherwise would have captured from the atmosphere and stored in that calendar year.
9 Coal-burning power plants are responsible for approximately 40 percent of U.S.
GHG emissions. Many Democrats from coal states have expressed concern about how carbon-cutting measures could hurt the industry. However, the bill is supported by Democrat Max Baucus of Montana, a leading producer of coal, whose support is considered pivotal in garnering the support of coal states. Baucus said he will support the measure as long as it includes provisions to fund research and development for clean coal technologies.
10 White Paper, The Economics of America’s Climate Security Act of 2007: (S. 2191,
Lieberman-Warner Climate Bill), PREPARED BY SENATOR JAMES M. INHOFE,
RANKING MEMBER, UNITED STATES SENATE COMMITTEE ON ENVIRON-
MENT AND PUBLIC WORKS (May 2008).
11 While Democrats control the Senate 51-49, technically there are 49 Democratic senators and two Independent senators, Joe Lieberman (CT) and Bernie Sanders
(VT), who caucus with the Democrats to create the majority.
12 A cost analysis released by the EPA on March 14, 2008, found that implementation of the Lieberman-Warner bill to limit greenhouse gas emissions through a cap-andtrade system would cause an increase in energy prices and lead to slower economic growth. See ENVIRONMENTAL PROTECTION AGENCY, EPA ANALYSIS OF THE
Addressing Climate Change in the 110th Congress 8

LIEBERMAN-WARNER CLIMATE SECURITY ACT OF 2008: S. 2191 IN 110TH
CONGRESS (2008). The report offers a range of possible economic effects of implementing the cap-and-trade bill. The Congressional Budget Office concluded in an April 10 report that while S. 2191 would increase federal revenues by $1.21 trillion between 2009 and 2018 and revenues would exceed new direct spending by $78 billion, the bill would cost the private sector more than $90 billion each year between 2012 and 2016 and more in subsequent years.
13 Sixteen states have adopted overarching GHG emissions reduction targets. States are also entering into regional partnerships to address climate change, such as the
Western Climate Initiative and the Midwestern Regional Greenhouse Gas
Reduction Accord.
14 The Lieberman-Warner bill has a 62-66 percent emission reduction goal for total U.S. emissions and a 70 percent emission reduction goal for covered entities.
15 EISA, which became public law (P.L. 110-140) in December 2007, set nationwide fuel economy standards.
16 Climate Change Legislation Design White Paper, Scope of a Cap-and-Trade
Program, p. 9, PREPARED BY THE COMMITTEE ON ENERGY AND COMMERCE
STAFF (October 2007).
17 Id.
at 22.
18 Climate Change Legislation Design White Paper, Competitiveness Concerns/Engaging Developing Countries, p. 1, PREPARED BY THE COMMITTEE ON ENERGY
AND COMMERCE STAFF (January 2008).
19 Id.
20 Id.
at 12.
21 Id.
at 8.
22 Prospect of EPA regulations a “glorious mess”, GREENWIRE, E&E Publishing,
April 4, 2008.
23 Climate Change Legislation Design White Paper, Appropriate Roles for Different
Levels of Government, p. 18, PREPARED BY THE COMMITTEE ON ENERGY AND
COMMERCE STAFF (February 2008).
24 Id.
25 President Bush Discusses Climate Change, OFFICE OF THE PRESS SECRETARY
(April 16, 2008).
26 Darren Good, Climate Change Given a 50-50 Chance of Passage This Year,
CONGRESSDAILY, March 11, 2008. Democrats are expected to gain up to six or seven Senate seats to add to their 51-49 majority for the 111th Congress in 2009.
27 In 1992, the United Nations Framework Convention on Climate Change treaty was developed to prevent dangerous anthropogenic interference with the climate system.
The treaty was ratified by Congress and signed by President George H.W. Bush. The resulting negotiations led to the development of a treaty for mandatory greenhousegas reductions by developed countries (but not developing countries such as China or India) that was completed in 1997 in Kyoto, Japan. The Kyoto Protocol calls for developed countries to reduce emissions by at least five percent below 1990 levels by 2012. The treaty was ratified by 174 nations – but not the United States – and went into effect in 2005. Kyoto signatories are collectively projected to be in compliance with the treaty, while U.S. emissions, on the other hand, are already 16 percent higher than 1990 levels. The current Bush administration has focused its U.S. climate change policy solely on voluntary initiatives to reduce the growth in GHG emissions.
28 According to the fourth Assessment Report of the IPCC, stabilizing greenhouse gas concentrations in the atmosphere at a level that will prevent dangerous interference with the climate system will require a global effort to reduce anthropogenic GHG emissions worldwide by 50 to 85 percent below 2000 levels by 2050. The IPCC is organized under the auspices of the United Nations and engages the participation of more than 2,000 scientists from all around the world. The IPCC was established to provide decision-makers and others interested in climate change with an objective source of information about climate change.
29 The six major greenhouse gases are carbon dioxide (CO oxide (N
2 hexafluoride (SF
6
).
2
); methane (CH
4
); nitrous
O); hydrofluorocarbons (HFCs); perfluorocarbons (PFCs); and sulfur
30 Each emission allowance will have a unique serial number that will include the calendar year for which it was created.
31 A CO
2
equivalent is the quantity of a greenhouse gas that the EPA determines makes the same contribution to global warming as one metric ton of CO
2
.
32 According to the Senate Environment and Public Works Committee, the bill places a separate declining cap on the consumption and importation of HFC consumption into the United States. The first capped year is 2010, and the 2040 cap is 70 percent below the 2010 cap. HFCs are 14,800 times more potent than CO
2
. Because of this high greenhouse warming potential, one ton of HFCs in the same trading system as CO
2
would cost several thousand times more than a ton of CO
2
. This high cost could force companies to close their HFC facilities. Thus, the bill does not allow
HFC allowances to be traded with emissions allowances. The separate market for
HFCs ensures that emissions of this gas will be reduced in a way to minimize disruption to the industry and maximize efficiency gains in appliances. The proceeds of the auction will be used to support programs that will reduce the use of substances that have significant ozone depletion and global warming potential.
33 It should be noted that, under the bill, owners or operators of covered facilities using coal are allowed to discount from their submission requirement the number of metric tons of CO
2
that they geologically sequester. Owners or operators of other types of covered facilities are not allowed to perform such discounting. Instead they receive an emission allowance back from EPA for each metric ton of CO
2
that they geologically sequester, destroy, or use as feedstock in a matter that prevents its release into the atmosphere.
34 Offset allowances come into being when EPA certifies that a non-covered facility has done something that either has reduced the number of CO
2
equivalents that the facility otherwise would have emitted in that calendar year or has increased the number of CO
2
equivalents that the facility otherwise would have captured from the atmosphere and stored in that calendar year.
Addressing Climate Change in the 110th Congress 9

Authors:
Michael W. Evans
Partner
202.661.3807
michael.evans@klgates.com
Tim Peckinpaugh
Partner
202.661.6265
tim.peckinpaugh@klgates.com
Akilah Green
Associate
202.661.3752
akilah.green@klgates.com
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