Low Carbon Economy Act hits Senate floor – but will fixed pricing for carbon trade make it incompatible with other carbon trading systems?

Publish date: July 16, 2007

Written by: Svend Søyland

WASHINGTON-Among the flurry of climate proposals to hit the Senate floor this spring, New Mexico’s Democratic Senator Jeff Bingaman’s revised proposal of the Low Carbon Economy Act, which covers greenhouse gas caps from industry to imports and supports carbon capture and storage (CCS), attests to a more accommodating atmosphere in Washington to taking action against climate change.

Bingaman presented the proposal last week. Though the event was overshadowed by the heated debate over the war in Iraq, the bill could gain some traction. But the Low Carbon Economy Act also implies a fixed pricing structure for carbon trading that would be incompatible with world markets. The proposal is scheduled for a vote in the Senate this fall.

Bingaman’s Low Carbon Energy Act is an economy-wide legislation that covers major stationary sources of carbon dioxide emissions such as petroleum refineries, natural gas processing plants, importers of liquid fuels, other greenhouse gasses besides carbon dioxide, as well as large coal consuming facilities. The unique feature of the legislative proposal is that it does not cover the transport sector, as it is hoped that limits placed on the fossil fuels that industry depends on will induce transport to seek more environmentally friendly fuels.

The proposal also focuses to achieve cuts to 1990 levels, similar to the Kyoto Protocol of which the United States is not a signatory, by 2030. The bill also seeks to engage developing nations in cuts while protecting US economic interests.

Cap and Trade with modest carbon dioxide pricing
At the outset, most carbon dioxide allowances will be given out for free to private entities during the first five years after the Low Carbon Energy Act comes into effect in 2008, should it be passed.

Eight percent of the allowances will be set aside to create incentives for CCS technologies. The US Government will auction a quarter of the allowances to support research and development of low-and non-carbon technologies, climate adaptation and support to low-income households.

Farmers will get a 5 percent allowance to further agricultural carbon sequestration. One percent of the allowances will be returned to those who comply with the legislation early. Nine percent of the allowances will be distributed to States to be used at their discretion to address regional impacts, promote technology or enhance energy security.

The price will start at 12 USD per metric ton of carbon dioxide in 2012. The price will increase at a rate of 5 percent above the rate of inflation. Depending on the level of breakthrough in technologies directed toward CCS, the price could settle at approximately $23 per tonne in 2030.

Compared to EU carbon trading prices, the Low Carbon Energy Act is very modest. What is more troubling, says the Bellona Foundation, is that a set price structure will effectively create discrete and incompatible carbon markets worldwide.

CCS fund from auctions

Entities that capture and store carbon dioxide will receive credits by the ton of carbon dioxide captured. Facilities retrofitted for CCS technologies by 2030 will receive an additional bonus during their first 10 years of operation. These bonuses would amount to a $250 billion equivalent for 150 GW of new power generation with CCS technology by 2030. The Bellona Foundation asserts that this is something power utilities should find attractive.

The United States will lead – if others follow

Bingaman emphasised during his unveiling of the proposal last week that United States had to be a leader not a follower. To engage developing nations such as India, China and Brazil, fresh funding for partnerships and technology transfer programmes must be offered. Based on this proposal some $5 billion would be made available to promote technology transfer and carbon dioxide reductions in developing countries. He mentioned the Asia Pacific Partnership for Clean Energy and as a possible model.

Carrots and Sticks

If countries labeled as emerging economies match the US reductions proposed under the Low Carbon Energy Act, the US president would have the option of going for deeper reductions below 60 percent of the 1990 level by 2050. On the other hand, if other countries fail to make progress in their emission reductions, the president could levy carbon taxes on imports by rating them according to their carbon content. This is a clever way of preventing carbon leakage while protecting US-based workplaces.

Bipartisan – but will it survive the Senate?

The biggest question is, of course, if this legislation will fare better in the other proposals. An impressive list of sponsors including both Republican Senators Lisa Murkowski and Ted Stevens from Alaska as well as Republican senator John Warner of Virginia could prove helpful. Warner is meanwhile drafting a new iteration of the climate bill with Connecticut’s Democratic Senator Joseph Lieberman.