WRI analyzes emissions caps, allowances, offsets, and other critical components of the American Clean Energy and Security Act.What are the key elements of the climate bill approved by the House of Representatives on June 26?The bill contains four major elements:A clean energy requirement, designed both to set new standards for current types of power generation and to accelerate development and deployment of clean energy technologies such as renewables, energy efficiency and carbon capture and storage.An efficiency requirement that provides funding for energy efficiency programs, and the setting of stronger building codes and product efficiency standards.A cap and trade program that sets mandatory caps on 87 percent of U.S. greenhouse gas (GHG) emissions including the electric power and oil and gas sectors, and heavy industry.Measures designed to ease the transition into a low carbon economy by providing assistance to those impacted by a cap – including industry, affected sectors of America’s workforce, and low income households; these also include support for international climate change programs.What emission reductions would be achieved if this bill was implemented?Implementation of the cap would require emissions reductions from covered sources to 17% below 2005 levels by 2020 and 83 percent below 2005 levels by 2050. Total U.S. GHG emissions would be reduced, as a result, by 15% below 2005 levels by 2020. This exceeds President Obama’s goal of reducing emissions to 1990 levels by 2020 (approximately 14% below 2005 levels). Covered sources would be permitted to use offsets in place of on-site reductions to meet a substantial amount these requirements. In addition, implementing the American Clean Energy and Security Act (ACESA) would result in emissions reductions beyond those generated by the pollution cap.The bill contains substantial complementary requirements, including emissions performance standards for uncapped sources and emission reductions from forest preservation in developing countries. When these are taken into account, GHG emissions could be reduced by 28 percent below 2005 levels by 2020 and 75 percent below 2005 levels by 2050. The bill also contains requirements related to international offsets – used for compliance with the federal cap and trade regime. Factoring these in would make potential emission reductions from the bill even greater, reaching up to 33 percent below 2005 levels by 2020 and up to 81 percent below 2005 levels by 2050, depending on the quantity of offsets used.For more information, see WRI’s analysis of emission reductions under cap-and-trade proposals in the 111th Congress. What are the bill’s offset provisions?The bill allows for up to 2 billion metric tons of offsets a year, split 50/50 between domestic and international activities. Domestic offsets would come from GHG emissions sources not covered by the carbon cap, such as carbon sequestration in forestry and agriculture. International offsets would be generated from activities that reduce forest loss, as well as sectoral crediting mechanisms and other programs in developing countries. Authority over almost all offsets will rest with the Administrator of the Environmental Protection Agency. However, the U.S. Department of Agriculture (USDA) will oversee the domestic forestry and agriculture component of the offsets program.Once approved by the appropriate regulator, these offsets would be traded in domestic and international carbon markets, purchased by capped sources, and used toward their legal compliance with the emissions cap.(If the Administrator finds that 1 billion metric tons domestic offsets are unavailable in any given year, the 50/50 split may be adjusted to increase the amount of international offsets – up to a 25/75 ratio.)What aspects of the bill are causing concern?Several areas of the bill raised concerns among different interests and constituencies, including environmental groups and carbon intensive industries. These included, but were not limited to, the following issues.Role of USDA: The bill gives authority to the U.S. Department of Agriculture for the administration of domestic GHG emissions offsets generated by farms and forests in the U.S. While USDA has an important role to play supporting carbon sequestration, it has less expertise on regulating pollutants which is the province of the U.S. Environmental Protection Agency (EPA). The respective roles of the two agencies in ensuring robust carbon accounting for offsets under a U.S. cap and trade program remains to be satisfactorily resolved.Trade Provisions: The final version of the bill introduced controversial new trade provisions which would enable the United States, from 2020, to use aggressive, unilateral border measures to impose duties on certain energy intensive foreign goods. President Obama publicly expressed concern about the provision which he described as “protectionism.”Allowance Allocations: These remain an area of contention. Some constituencies – including various environmental groups – argue that industry received too much assistance. Others – including carbon intensive industrial corporations – argue that more assistance is needed to cushion the transition to cleaner technology. Some in the international community believe too few allowances are dedicated to assisting developing countries as they adapt to climate change impacts and adopt clean energy technologies.Biomass Emissions: There are concerns that the bill’s provisions accounting for emissions from biomass may potentially include fuels that yield a net increase in GHG emissions.What happens next?The historic passage of the American Clean Energy and Security Act has generated substantial momentum for U.S. climate legislation to become law, possibly as early as the end of 2009.Action now moves to the Senate, where the Environment and Public Works Committee will take up its own climate legislation in July. Other Senate committees including the Energy and Natural Resources Committee, Commerce Committee, Agricultural Committee, Finance Committee and the Senate Foreign Relations Committee all are likely to take actions on parts of the legislation that fall within their jurisdiction. The EPW committee will work on the bill after the summer recess with floor debate likely later this fall. Then, the Senate leadership will need to pull these various parts together for a vote on the Senate floor. EPW Committee chair Barbara Boxer and the Senate leadership have made it clear that passage of climate legislation is a key priority.If the Senate does pass a bill, it will need to be reconciled with the American Clean Energy and Security Act. To become law, the joint legislation would then receive a final vote in both chambers, before being sent to the president for signing. This entire process could conceivably be completed in 2009. In December, the U.S. will attend negotiations to conclude a post-2012 international climate change agreement in Copenhagen. A firm U.S. commitment to emissions reductions will be key to a successful outcome. What assistance would industry and consumers receive to cushion the transition?Title III of the bill provides details on the distribution of emission allowances to aid industries and consumers affected by the transition to a clean energy, low carbon economy. The vast majority of these allowances – 76 percent – are directed to consumer assistance and other public benefits between 2012 and 2025. (This is true regardless of whether they are distributed by allocation or auction.)For example, the largest component of allowances devoted to public benefit – 39 percent between 2012 and 2025 – is awarded to electric power distributors, with the requirement that the benefit from these allowances must be passed on to consumers to cushion against potential increases in energy bills. Similarly, allowances are designated for consumers of natural gas, heating oil and propane. States would also receive some allowances, to be used for specific purposes such as deployment of clean energy technologies. Between 2012 and 2025, at least 18 percent of total allowances would be auctioned. The proceeds would be channeled into programs to assist low income energy consumers and support other federal programs on adaptation, worker assistance and deficit reduction. The bill also earmarks a small percentage of allowances to the automobile industry to help re-tool factories to manufacture new, clean vehicles such as plug in hybrids. Finally, between 2012 and 2025 up to 19 percent will be given away for free to petroleum refineries, certain electric power generators, and trade exposed industries to aid their adjustment to a carbon constrained economy.For more information, see WRI’s analysis of allowance distribution.