The Policy Buffet (Part 2): Understanding the American Power Act

This is the second post in a series that covers the Senate’s current energy and climate proposals. The introductory post can be found here.

Among the various climate and energy proposals floating through the Senate, the American Power Act (APA) has received the lion’s share of attention. The bill, co-sponsored by Sens. John Kerry (D-Mass) and Joe Lieberman (I-Conn), was introduced early in May 2010. To date, the APA remains the most comprehensive package to address both energy and climate policy.

Sens. Kerry and Lieberman have promoted the bill as a job-creating tool that would transition the United States to an economy founded upon clean and domestic energy sources. The plan has five basic principles:

1. Protection: The APA protects consumers and businesses by returning program revenues to them to offset increased energy costs. It also aids industry by investing in low- and zero-carbon technologies and uses program revenues to help reduce the federal deficit.
2. Independence: The bill reduces American dependence on foreign oil by investing in domestic energy (including increased use of renewables, expanded offshore drilling and support for nuclear).
3. Diversification: The program invests in a diverse portfolio of energy sources, promoting improvements in current technologies, energy innovation and advanced infrastructure.
4. Flexibility: The APA treats different sectors (utilities, industry, manufacturing and transportation) as separate entities, each requiring unique approaches to reduce emissions.
5. Certainty: The APA’s provisions ensure market stability and minimize economic risk. It targets the largest polluters and sends clear market signals by establishing a price collar – which keeps prices from going too high or too low – on carbon. These and other tools aim to reduce the chance of corruption or manipulation.

Like the House bill, the Kerry-Lieberman plan would reduce carbon dioxide levels by 17 percent of 2005 levels by 2020 and 83 percent by 2050. The APA does this via cap-and-trade. The program starts in 2013 with separate systems for utilities and refineries. Three years later, a separate cap-and-trade system for heavy industry (i.e. producers who emit 25,000 tons or more of carbon dioxide each year) enters into effect. Around 7,500 sources would be included in the program altogether.

Allowances

Initially, 25 percent of allowances would be auctioned, rising to 100 percent in 2035. Like ACES, the APA has been criticized for freely allocating too many allowances. Critics argue that without auctioning allowances, it is difficult to appropriately price carbon or raise enough funds to benefit the public (by, for example, reducing other taxes or investing in low-carbon technologies).

However, Harvard economist Robert Stavins points out that it matters more where allowance value accrues, as opposed to where allowances are distributed. His analysis shows that 82 percent of the bill’s allowance value would ultimately be directed to consumers and public purposes while the remaining 18 percent would accrue to the private sector. Economic policy, Stavins says, recommends a split like this.

Until 2016, the value of allowances that would otherwise be distributed is instead used to offset industrial electricity rate increases and to enhance efficiency. Starting in 2016, allowances are provided to energy- or trade-intensive industries to cover compliance costs. In the transportation sector, fuel producers and importers are required to purchase allowances at a preset price.

An EPA analysis concluded that the APA’s allocation of allowances would “essentially eliminate any adverse effect that a cap-and-trade program would otherwise have on energy-intensive trade-exposed industries’ international competitiveness, and can thereby prevent emissions leakage that might otherwise arise if such a program were to reduce the competitiveness of U.S. industry.”

Impact on consumers

The EPA found that the program would have only a “modest” impact on consumers: between 2010 and 2050, households would pay an average of $79 to $146 each year. As David Roberts at Grist notes, this is roughly the equivalent of a monthly subscription to Netflix and a weekly supply of microwave popcorn.

For most Americans, this is crucial. People want to know that their jobs are secure and that new policies won’t make their electricity bills skyrocket. Two-thirds of the APA’s program revenues would be returned to consumers through electricity bill discounts and rebates. Further, those affected more heavily by the new legislation would receive added assistance.

Regulatory consistency

Numerous provisions in the bill guarantee consistency. Whereas some proposals allow state and federal mechanisms to work alongside one another, the APA creates one unified system of regulation. Specifically, the bill’s cap-and-trade system supersedes those already used on the state level. Those states whose programs may have generated greater revenue than a national one are compensated for their prior efforts. And to ensure stability, the bill sets a price collar (essentially a range of possible prices) on carbon so that industry has a clear signal of what present and future emissions could cost. At its outset, the collar is defined by a $12 floor and a $25 ceiling (each would increase 3 and 5 percent, respectively, over inflation each year).

The Peterson Institute for International Economics estimated that carbon prices would realistically start at $16.47 per ton in 2013 through APA and reach $55.44 in 2030. As a result, emissions from covered sources would decrease 22 percent (below 2005 levels) by 2020 and 42 percent by 2030.

Energy RD&D

The APA promotes research, development and deployment for clean energy by investing $70 billion over ten years in renewables and advanced vehicle technology. It spurs innovation by increasing tax credits for clean energy manufacturing, generating $5 billion each year. The bill also directs more than $6 billion annually to improve transportation efficiency. Tax incentives, for example, would encourage conversion to natural gas vehicles in the heavy-duty transportation sector.

The bill does not, however, focus solely on renewables. To promote energy independence and reduce oil imports, the plan endorses offshore drilling. Kerry and Lieberman responded to the Gulf oil spill by granting states the right to deny offshore drilling within 75 miles of their coastlines. At the same time, states are encouraged to drill offshore by providing them with 37.5 percent of drilling revenues (to help protect coastlines and ecosystems).

Recognizing present and future dependence on coal, the APA provides $2 billion annually in incentives to research, develop and commercially deploy carbon capture and sequestration (CCS). These funds are intended to feed 72 GW of CCS-equipped generation into the grid. The bill also removes disincentives that have previously impeded natural gas generation. Finally, it creates $54 billion in loan guarantees and tax credits for nuclear power, also establishing regulatory risk insurance for 12 new projects, streamlining the licensing process and improving proliferation control.

Offsets

Offsets also have an important function in the bill. Farmers, for instance, would be compensated for actions such as designating lands for wind turbines, growing crops for biofuels and biomass or preserving soil to capture carbon. Offsets would also be a boon to regulated polluters. The EPA analysis estimated that domestic offsets would account for 18 percent of reductions, with international offsets adding another 18 to 29 percent. As a result, compliance with the program would be more manageable.

Economic impacts

The Peterson analysis estimated that the program would create an additional 203,000 to 440,000 jobs annually by 2020 and would raise $41.1 billion in clean energy investment each year. By 2030, fossil fuels would account for 70 percent of the domestic energy supply (down from 84 percent today) while renewable and nuclear energy would rise from 8 percent of domestic consumption today to 14 percent and 16 percent, respectively, in 2030. Renewables would represent 18 percent of all power generation capacity and nuclear would account for another 15 percent by 2030. Meanwhile, annual domestic spending on imported oil would decrease between $51 billion and $93 billion each year. The study also determined that electricity rates would rise an average of 3 percent between 2011 and 2030 and gasoline prices would increase between 11 and 24 cents per gallon.

The ClimateWorks Foundation came to similarly reassuring conclusions: the APA would add about 540,000 jobs by 2030, reduce household utility bills by $35 per year through 2020, preserve an average annual GDP growth rate of 2.3 percent between 2020 and 2030 and reduce greenhouse gases by 45 percent of 2005 levels by 2030.

Climate impacts

Unfortunately, analyses frequently focus solely on economic costs and overlook the benefits of addressing climate change. Emissions reductions from the APA, in tandem with action from other countries, would increase the likelihood of keeping global temperature rise below 2° C by 75 percent (by 2100). The EPA determined that inaction would leave a one percent chance of keeping temperature rise below that level.

Other non-economic benefits of the bill include reductions in emissions of mercury (43 percent below business as usual by 2030), nitrogen oxides (34 percent) and sulfur dioxide (6 percent) as well as water savings of 11.7 billion gallons per year through 2030.

Energy and climate politics in the Senate remain in limbo, despite growing pressure to act, at the very least, on the former. Efforts to pass an APA-style cap-and-trade bill may likely be stalled before the November elections. Therefore, concessions will almost certainly need to be made and provisions from non-APA proposals will probably play a prominent role in upcoming decisions. The following post in this series will highlight the politics of the APA and provide insight into its fate. Later posts will dissect which features of the Senate’s alternative policies may ultimately prevail.

Section-by-section overviews of the American Power Act can be found here and here.

A side-by-side comparison to the ACES bill can be found here.

For a brief summary of how cap-and-trade works, go here.