Author: John Larsen

This summary provides a concise overview of S. 2877, the Carbon Limits and Energy for America’s Renewal Act (herein referred to as CLEARA), as introduced by Senators Cantwell and Collins on December 11, 2009.

Note: Small revisions were made to clarify certain aspects of the fossil fuel carbon cap targets and the price ceiling contained in the CLEAR act.

• Download the Complete Summary (PDF, 4 pages, 146 Kb)
  (includes footnotes and references)

CLEARA would establish a program to limit the sale of carbon contained in all fossil fuels sold in the United States. Revenue generated from the program is primarily distributed to eligible U.S. citizens through dividend payments with some revenue set aside for other purposes.

This summary follows the structure of the bill except where we believe it facilitates understanding by grouping related components together. For more information on specific components of CLEARA, please refer to the actual legislative language as referenced by section and page number in this document.¹

Global Warming Pollution Reduction Targets and Timetables²

Goals and Caps. CLEARA sets non-binding economy-wide greenhouse gas (GHG) emissions reduction goals (Sec. 3, pg. 7) and a mandatory annual cap on the quantity of fossil fuel carbon that may be sold into commerce in the United States (Sec. 4, pg. 8);

• Goals: CLEARA requires the president to set non-binding economy-wide GHG emissions reduction goals and instructs the president to meet these goals through a combination of the fossil fuel carbon cap and expenditures from a fund created by CLEARA, the “Clean Energy Reinvestment Trust Fund” (or CERT, defined and explained below) which is subject to annual appropriations by Congress. The goals are:

  • 2020: 20 percent below 2005 (~7 percent below 1990)
  • 2025: 25 percent below 2005 (~12 percent below 1990)
  • 2030: 42 percent below 2005 (~33 percent below 1990)
  • 2050: 83 percent below 2005 (~80 percent below 1990)

• Caps: CLEARA requires the secretary of the Treasury to set a mandatory limit on the sale of fossil fuel carbon on the following schedule indexed to 2012 emissions levels (as projected in 2011; reductions relative to 2005 and 1990 levels are contingent on the actual level of the fossil fuel carbon cap in 2012):

  • 2012: 0 percent below 2012
  • 2020: 5 percent below 2012
  • 2030: 29 percent below 2012
  • 2050: 82 percent below 2012

Adjustments to the fossil fuel carbon cap. The president may increase or decrease the number of carbon shares³ available for auction if he/she submits to Congress a notification of the modification and Congress passes a joint resolution approving the modification within 30 days (Sec. 4(a)(2)(C), pg. 10). The president may submit a notification modification to the cap for the following reasons:

• Changes in climate science
• To avoid dangerous interference with the climate system
• Any international obligations of the United States
• To preserve the international competitiveness of the United States
• To account for permanently sequestered carbon
• To provide a sufficient price signal to spur private investment in clean energy research, development and deployment
• If annual appropriations from Congress are insufficient to meet standards in Sec. 3

Point of Regulation, Emissions Reporting and Coverage

Covered gases: Carbon contained in fossil fuels that ultimately will be combusted and emitted into the atmosphere as CO2 (Sec. 2(8), pg. 3).

Mandatory reporting: Emissions reporting is not referred to in this legislation.

Point of regulation: A completely upstream approach is used with all entities covered at the start of the program in 2012. All first-sellers of fossil fuel carbon into the U.S. economy are required to hold allowances for all fossil fuel carbon sold (Sec. 4(a)(1)(B), pg. 9). The limitation covers approximately 81 percent of total U.S. GHG emissions in 2005.

Allowance Value Distribution

Distribution of Value: 100 percent of all allowances are auctioned to regulated entities. Auction proceeds are divided as follows:

• 75 percent of proceeds are deposited in the Carbon Refund Trust Fund (Sec. 4(f)(2), pg. 28)
• 25 percent of proceeds are deposited in the Clean Energy Reinvestment Trust Fund (Sec. 6(b)(1)(A), pg. 33)

Auction procedure: Only regulated entities may participate in auctions. Auctions are initially held monthly though the secretary of the Treasury may change the frequency under certain circumstances (Sec. 4(b), pg. 20).

Expenditures from the Funds:

• Amounts in the Carbon Refund Trust Fund are available for the purpose of paying energy security dividends (Sec. 4(f)(3), pg. 28) (See Assistance During the Transition to a Low Carbon Economy section below),

• Amounts in the CERT Fund could be available, subject to budget authority and annual congressional appropriations, for a range of purposes (Sec. 6(c)(1), pg. 33-37). There is no guaranteed amount of spending for any particular purpose. Purposes eligible for funding include (See Assistance During the Transition to a Low Carbon Economy and Clean Energy, Efficiency and Supplemental Greenhouse Gas Reductions sections below):

  • Worker, community and business transition assistance,
  • Addressing competitiveness impacts on energy-intensive industries, and
  • Supporting clean energy, efficiency and supplemental GHG emissions reductions

Clean Energy, Efficiency and Supplemental Greenhouse Gas Reductions

CERT Fund: CLEARA establishes a trust fund in the U.S. Treasury called the “Clean Energy Reinvestment Trust Fund,” Subject to annual appropriations from Congress, the president is given general discretion to request from Congress the use of CERT Funds to support programs and initiatives that provide incentives, loans and grants to (Sec. 6, pgs. 33 – 37):

• Invest in clean energy and fuels research, development and deployment activities
• Fund efficiency projects, including weatherization for low-income and public buildings
• Support residential fuel switching
• Provide matching grants for energy efficiency consumer loan recipients
• Fund offset-like domestic and international projects that verifiably reduce, avoid or sequester GHG emissions through forestry and other land use practices
• Curtail emissions of non-fossil fuel GHGs, black carbon and other emissions that affect the climate

Efficiency Consumer Loan Program: The secretary of the Treasury would establish a program for any qualifying individual to borrow against any future dividend (see Assistance During the Transition to a Low Carbon Economy section below) to invest in energy efficiency or other clean energy technologies that would reduce the individual’s energy bills and reduce GHG emissions (Sec. 5, pg. 31).

Reimbursement for Sequestered Carbon: In addition to the aggregate annual carbon shares limit, the secretary of Treasury is required to issue carbon shares for fossil fuel carbon that is:

• Verifiably sequestered in a carbon capture and storage facility
• Re-injected into an oil-and-gas reinjection project, or
• Embedded in manufactured products (Sec. 4(c), pg. 25)

Voluntary Carbon Reductions: The secretary of the Treasury is required to reduce the aggregate annual carbon shares limit by an amount equal to the total quantity of all verifiable carbon reductions attributable solely to voluntary emissions reductions efforts (Sec. 4(d), pg. 26).

Cost Containment

Trading: Regulated entities and certain other recipients of allowances may only conduct allowances transactions on a dedicated public exchange. No other entities may conduct such transactions (Sec. 4(b)(7()A), pg. 23).

Banking and Borrowing:

• Banking: All allowances except safety-valve allowances may be used for compliance as much as ten years after the initial date of issuance (Sec. 4(b)(5), pg. 22).
• Borrowing: Borrowing is not expressly permitted; however, compliance periods may last up to two years allowing entities flexibility to sell fossil fuel carbon without holding allowances, in effect a form of borrowing for a brief period of time (Sec. 4(a)(1)(B), pg. 9).

Price collar: CLEARA sets minimum and maximum prices for allowances available at each auction (Sec. 4(a)(4), pg. 13):

• Price floor: No allowance shall be sold at auction for less than $7 (in 2012 dollars) in 2012. The price floor increases at a rate of 6.5 percent per year plus the rate of inflation.

• Price ceiling (referred to as the safety-valve price): An unlimited amount of allowances shall be sold at auction if prices rise to the price ceiling, which is initially set at $21 (in 2012 dollars) in 2012. Any allowances sold at the price ceiling are in addition to those issued under the fossil fuel carbon cap. The price ceiling increases at a rate of 5.5 percent per year plus the rate of inflation.

  • Use of safety-valve allowances: Any purchaser of safety-valve allowances must use them for compliance within 90 days of purchase.
  • Proceeds from the sale of safety-valve allowances are deposited in the CERT fund and are intended to be used for programs that curtail non-fossil fuel GHG emissions or increase sequestration within the United States, subject to annual appropriations (Sec. 4(b)(4)(C), pg. 21).

Offsets: Only allowances released at auction or distributed for reimbursement may be used for compliance by regulated entities; therefore, offsets may not be used for compliance.

Assistance During the Transition to a Low Carbon Economy

Energy Security Dividend: Each qualified individual in the United States shall receive a per-capita Energy Security Dividend on a monthly basis issued under a program administered by the secretary of the Treasury (Sec. 5, pg. 29).

• Funding: All dividend payments are funded through auction proceeds deposited in the Carbon Refund Trust Fund.
• Dividend amount: Each dividend payment will be equal to the total amount of auction proceeds available in the Carbon Refund Trust Fund each month divided by the total number of qualified individuals.
• Qualified individuals: all individuals who lawfully reside in the United States
• Taxation: Energy Security dividends are not subject to income taxation

International Competitiveness:

• Targeted Relief Funds for Exporters (Sec. 4(a)(6), pg 16):

  • Beginning in 2013, the secretary of Treasury must distribute compensation from the CERT Fund, subject to annual appropriations, to exporting energy-intensive industries that are “unable to compete due to unfair market prices arising from disparate fossil carbon limits or fees among countries”
  • Relief funding would be provided to entities as compensation for additional costs, per unit of production output, arising from “disparate carbon limits among countries,” with priority to the most competitively disadvantaged sectors.
  • 6 months after enactment (and periodically thereafter), the secretary of the Treasury would propose data sources and methodologies to identify sectors and commodities that should receive funding under this provision.

• Border Carbon Adjustment (Sec. 4(a)(7), pg 18):

  • Beginning in 2013, the secretary of Treasury must impose fees on importers for fossil fuel carbon emissions associated with the production of imported commodities.
  • Such fee would only apply if domestic producers of such goods would be “demonstrably disadvantaged economically” without the fees, the country of origin “does not impose comparable fees or limits” on fossil fuel carbon emissions, and if it is implemented in a manner consistent with trade agreements and treaties to which the United States is a party. All revenues would be deposited in the CERT fund.
  • 6 months after enactment (and periodically thereafter), the secretary of the Treasury would propose data sources and methodologies to identify sectors and commodities covered by this provision.

Worker, community and business transition assistance: Subject to annual appropriations from Congress, the president may use CERT Funds to carry out programs and initiatives that provide incentives, loans and grants to provide targeted, region-specific assistance (Sec. 6, pgs. 33 – 37):

• To those in the United States “experiencing the greatest economic dislocation due to efforts to reduce carbon emissions…”
• For early retirement of carbon-intensive U.S. assets that are “stranded by new market dynamics”
• To those in the United States that experience the most negative impacts from climate change
• For workforce training for careers in energy efficiency, renewable energy and other emerging “clean technology industries”
• To help low-income families pay utility bills
• To support climate change or ocean acidification mitigation and adaptation programs and research
• To support energy consumer protection advocacy programs

Carbon Market Access and Oversight

Market access and limits: Only regulated entities may participate in auctions and in transactions conducted over dedicated allowance exchanges (Sec. 4(b)(2), pg. 21).

• Limits on allowance purchases and holdings: Regulated entities are subject to limits on annual purchases of allowances and cumulative allowance holdings set by the secretary of the Treasury (Sec. 4(b)(6), pg. 22).
• Limits on allowance transactions: Regulated entities may only conduct allowances transactions on a public exchange administered by the secretary of the Treasury (Sec. 4(b)(7()A), pg. 23).

Derivative Markets: Regulated entities are prohibited from buying, selling or creating allowance derivatives. Only non-regulated entities may engage in derivative transactions. Any derivative markets that arise will be subject to oversight and regulations set by the secretary of the Treasury in consultation with other agencies (Sec. 4(b)(8), pg. 24).

Download the Complete Summary (PDF, 4 pages, 146 Kb)
(includes footnotes and references

An explanation of how WRI conducts analysis of climate and energy proposals before the US Congress.

In recent weeks there have been questions about WRI’s analysis on congressional climate and energy proposals, in particular our analysis of the Carbon Limits and Energy for America’s Renewal Act (CLEAR) Act, S. 2877 sponsored by Senators Cantwell and Collins. To provide some clarity, this note explains how we conduct this analysis and builds off the methodology and assumptions section of our most recent release. WRI welcomes any questions and feedback on this analysis; please feel free to contact John Larsen, jlarsen@wri.org.

Background on WRI’s analysis of congressional climate and energy proposals

WRI has conducted comparative analyses of congressional climate and energy proposals since 2006. Beginning with the 110th Congress, WRI has provided estimates of net greenhouse gas emissions (GHG) to the atmosphere, for each major economy-wide piece of legislation proposed. The analysis is intended to provide a consistent comparison across what are sometimes very different approaches to reducing GHG emissions.

Net Emission Reductions Under Cap-and-Trade Proposals in the 111th Congress, 2005-2050

In line with our institutional values and like all WRI research, our comparative analyses of congressional climate and energy proposals is peer-reviewed by external NGOs, think tanks, government agencies, and other independent analysts. Our methodology, data sources and assumptions are transparently documented in each report. Generally, we summarize our analysis in a chart accompanied by about ten pages of methodological information, with the strong expectation that readers inform their use of the chart through understanding of the methodology. The analysis looks at a narrow aspect of congressional proposals – the net impact the bills are expected to have on GHGs in the atmosphere.

For the purpose of this analysis, net emissions to the atmosphere means the sum of the cap set by the proposal and an estimate of emissions not covered by the program. This is the “emission caps only” scenario in our analysis. We then add other scenarios that include additional mandatory requirements beyond the cap(s) and a range of additional reductions that may occur under certain circumstances. In all cases WRI does not differentiate between emission reductions that take place in the U.S. or elsewhere. Oftentimes different bills cover different amounts and/or types of emissions sources and/or incorporate programs to reduce emissions outside the U.S. but at the end of the day it’s the sum of all of these components that constitutes our estimates.

While WRI’s analysis does not show that the CLEAR Act achieves emission reductions similar to other recent proposals, it is in no way a judgment of the bill’s structure or the political persuasions or motivations of the bill’s sponsors. It is simply an estimate of net GHG emissions under the requirements contained in the proposal. WRI applauds all constructive additions to the policy debate, and the CLEAR Act is no exception. As the only bipartisan proposal currently introduced in the 111th Congress, the CLEAR Act is a welcome addition to what is a proving to be a slow and deliberate discussion in the Senate.
With all of the above points in mind, here are responses to specific points in question about WRI’s analysis of the CLEAR Act:

1. Treatment of offsets. While it is a legitimate and important concern that offsets which are not real, permanent and additional will undermine the environmental integrity of any cap and trade program, it is also true that if offsets are high quality, are real, additional and permanent they represent true emission reductions. Despite justified concerns about the integrity of offsets, it would be equally arbitrary to assume that no offsets can be real, permanent and additional or to assume that offset quantity limits will always be met. WRI has flagged and researched this issue extensively. Because of this, WRI’s analysis is carefully qualified, as follows: “if the environmental integrity of offsets were not completely real, permanent, and additional then the emission reduction estimates included in this analysis would be diminished proportionately.” Prior to a June 25th analysis, the statement read “[W]e assume: Offsets will be real, permanent and additional. As a result, we depict offsets as a real reduction in total global GHG emissions.” This statement was changed in response to feedback from reviewers and others that it needed to be clearer. In both cases, the caveat was included to flag that the analyses should be used carefully. However, WRI’s assumption that offsets are “real, permanent, and additional” is the identical assumption used by the EPA, EIA, CBO, and others in their analyses.

The variability in the quality and quantity of offsets used is difficult to account for in a technical analysis like this as it is largely uncertain what shape offsets or offset-like projects would take in the United States under different proposals with different legislative language. However, we are open to input on how to account for this uncertain aspect of our analysis.

Another methodological challenge is that the CLEAR act does allow the purchase of additional, offset-like reductions through the Clean Energy Reinvestment Trust (CERT) fund. WRI did not count these in our analysis. As explained in point 3 below, the reason we did not include these reductions in the analysis is because they are subject to future congressional action, and not required by the bill alone.

2. Choice of BAU. WRI’s analysis relies on the EPA’s most recent ADAGE reference case (scenario 1) projections for business as usual emissions for three reasons. First, this particular reference case provides economy-wide projections rather than just components of the economy such as fossil fuel consumption. Second, this reference case includes all six Kyoto-defined GHGs, creating a complete picture of the impact on the environment. Finally and most importantly, this reference case projects emissions out to 2050. Peer-reviewers recommended this expression of BAU to be the most appropriate when conducting a comparative analysis of proposals that control GHGs out to 2050. We have heard the suggestion that EIA’s most recent, six gas projections, released in August 2009, would be more accurate; however, they only project out to 2030, and peer-reviewers cautioned against extrapolating model trends past 2030. Once the EPA ADAGE reference case is updated, WRI will update this component of our analysis. Finally, to ensure transparency, the methodology in our analysis clearly states, “This projection could be considered a slight overestimate of future emissions when compared to more recent projections released by the Energy Information Administration.” It is also important to note that no projection is perfect. The challenge is to use the most appropriate reference case available for the task at hand.

WRI noted in its analysis of the CLEAR Act that the proposal contains an interesting mechanism for initially setting the cap where it is indexed to the most recent emission projections. In order to be consistent across all proposals we relied on the EPA ADAGE reference case. However, we clearly acknowledged on page one of our analysis that “The CLEAR [Act] reduction targets are initially set at projected 2012 levels. Thus, if projected emissions are higher than those included in this analysis, there would be fewer total emission reductions; similarly, if emissions are lower, there would be greater total emission reductions relative to 2005 and 1990 than reported here.” We have constructed preliminary, unpublished estimates based on the latest EIA projections that suggest that total US emissions reductions under the CLEAR Act in 2020 could be closer to 4 percent below 2005 levels. This is 3 percentage points greater than our current published estimates.

3. What the analysis does not cover. To aim for comparability, the analysis only looks at what could be achieved by the bill itself, if it were to be enacted. We do this because we’ve found that trying to predict the actions of future members of Congress and other politicians quickly becomes a slippery slope. For instance, in the American Clean Energy and Security Act (ACESA), some have argued that the international clean technology deployment program in the bill could lead to additional, quantifiable emissions reductions. However, we did not count that because the result would be contingent on additional actions by future Congresses as well as international climate agreements. Similarly, under the CLEAR Act, the President is required to set emission reduction targets and is instructed to meet them using a combination of the emissions cap and money appropriated from the CERT Fund established by the bill. We count the emissions impact of the cap because it is clearly required by the bill itself. We do not count potential reductions that could be achieved by expenditures from the CERT fund because any spending of this fund requires additional action by future Congresses through the appropriations process. WRI solicited input from internal and external experts to fully understand this aspect of the CLEAR Act and all were unequivocal that this is the proper interpretation of the proposal. This is different than allowance set asides for funding emission reduction programs under proposals such as Waxman-Markey (also Bingaman-Specter and Lieberman-Warner in the 110th Congress) which guarantee a funding stream based on allowances and set program requirements in the proposal itself. WRI consistently applied the treatment of Congressional action in its analysis of the CLEAR act and did not use a double standard.

4. Charting CLEAR compared to other bills. We have heard the suggestion that this bill should be charted differently than other bills in our analysis. The CLEAR Act is very similar to other bills we’ve analyzed in the past. It is most similar to two specific types of bills. First, it is similar to several proposals from the 109th and 110th Congress that set economy-wide goals and authorized the President or EPA to promulgate regulatory measures to meet those goals. These include proposals from Sanders-Boxer, Waxman and Kerry-Snowe. Like these other proposals, the CLEAR act sets economy-wide emission reduction goals. However, the CLEAR Act is different in that the President may use only the emissions cap and the CERT fund and no other measures to meet these goals. The other proposal that the CLEAR act is similar to is the Van Hollen-sponsored Cap-and-Dividend Act put forth earlier this year. CLEAR and Van Hollen are similar in their choice of implementing agency, point of regulation and emissions coverage and 100% auction of allowances among other things. All of these previous bills were analyzed by WRI using the same methodology as we’ve used to analyze the CLEAR Act with no objections from bill sponsors or supporting interests.

I was surprised to learn from Nordhaus and Shellenberger’s recent piece in Foreign Policy that WRI has magical powers. In that piece the authors write:

Green groups insisted that the bill would reduce emissions and pointed reporters and green donors to allegedly independent analyses by the World Resources Institute (WRI). But the WRI, a major party to the cap-and-trade agreement negotiated by the EDF and NRDC with energy companies, simply used a magic accounting trick that was visible in plain sight: counting carbon offsets as real reductions of U.S. emissions.

Offsets typically fund activities such as tree planting and methane capture from landfills, and have proven over the last decade to be extremely unreliable, when they have not been outright fraudulent. The extensive offsets in Waxman-Markey would have allowed U.S. emissions to rise at business-as-usual rates over the next decade rather than declining to 17 percent below 2005 levels, as proponents of the bill claimed. Nevertheless, the WRI created graphs showing U.S. emissions magically going down 17 percent by 2020 and nearly 80 percent by 2050; the New York Times duly reprinted them; and partisans on both sides of the debate tacitly agreed to pretend as if proponents’ farcical claims about the bill’s mandated emissions reductions were true.

The authors’ claim that WRI is overselling the merits of climate legislation in Congress and that the analysis is “allegedly independent” is way off the mark.

While WRI is a member of the US Climate Action Partnership, the analysis in question is our own. Beyond the facts that our analysis is independent, non-partisan and is the product of a rigorous review process, it is clear that neither Nordhaus nor Shellenberger had actually read my analysis where it’s clearly stated that:

If the environmental integrity of offsets were not completely real, permanent, and additional then the emission reduction estimates included in this analysis would be diminished proportionately.

The quality of offsets is a critical component of the environmental effectiveness of any emission reduction program that incorporates them. WRI’s principal focus is on environmental integrity. A critical component of WRI’s climate strategy is working to ensure that any offsets allowed in a U.S. program are indeed real, verifiable, permanent and additional. This is reflected both in WRI’s published analyses and in conversations with congressional staff.

The suggestion that the integrity of WRI’s analysis was undermined for political gain or compromised due to on-going associations with private sector and civil society partners, or the philanthropic community that supports our work, is incorrect. Even more unfortunate is the suggestion that WRI fed this analysis to the press to aid passage of the bill. Their odd reading of the facts turns on its head a major tenet of WRI research by suggesting that it is a bad thing to share our research publicly. In fact, our research is not proprietary and always publicly available.

Second, the article suggests that Nordhaus and Shellenberger lack a fundamental understanding of the Waxman-Markey bill itself. They assert that the bill invests almost nothing in new clean energy technology:

The green giants in Washington – the Environmental Defense Fund (EDF), the Natural Resources Defense Council (NRDC), and the Center for American Progress (CAP) – claimed that cap and trade would constitute a breakthrough, and Chu dutifully defended the legislation, expecting it would include his $15 billion for R&D.

But Waxman and Markey ended up using virtually all of the money raised from carbon auctions to buy off fossil fuel interests, leaving virtually nothing for technology innovation… In the end, Waxman-Markey would give R&D $1.1 billion a year, less than a third of current levels, and would give coal and utility companies $32 billion.

This is hardly the case. Here’s a brief and hardly exhaustive list of the investments and new requirements for clean energy technology the bill requires that they missed (more details are here):

• About $4.5 billion a year for state renewable energy and energy efficiency deployment programs,
• $1.5 billion a year for clean vehicle manufacturing ,
• Half a billion dollars a year for state home heating oil and propane efficiency programs,
• Half a billion dollars a year for international clean technology deployment,
• $2 billion dollars a year for natural gas efficiency programs,
• $2 billion per year for clean coal technology deployment,
• Plus new, strict appliance standards,
• New federal building codes with carrots to get states to adopt them,
• GHG emissions standards for new coal fired power plants,
• Requirements for renewable energy and energy efficiency deployment,
• GHG emissions standards on non-fossil fuel sources such as landfills and coal mines,
• $1 billion a year for clean coal R&D, and
• plenty more including billions to help our country and the world adapt to unavoidable climate change impacts.

All of this is above and beyond the billion dollars for R&D that they reference in their article. It is unclear what legislation Nordhaus and Shellenberger are referring to: the version of Waxman-Markey that the House of Representatives passed in June represents an impressive investment that will do a lot to get the U.S. onto a completely new path to a clean energy future. Waxman-Markey is not a magic trick – it represents a major commitment to the kinds of technology-forcing that Nordhaus and Shellenberger say they want.

Finally, asserting that WRI would ruin its reputation by conjuring up numbers to sell a bill that does nothing goes directly against our mission. WRI exists to solve the most pressing environmental problems facing the world, including climate change, and will continue to examine policy issues with our independent, analytic approach. No wands, just empirical evidence.