Climate Change: Summary and Analysis of the Climate Stewardship Act (S. 342, S. 1151, and H.R. 759)

Climate Change: Summary and Analysis of the Climate Stewardship Act (S. 342, S. 1151, and H.R. 759)

Order Code RS22076
Updated July 18, 2005
CRS Report for Congress
Received through the CRS Web
Climate Change: Summary and Analysis
of the Climate Stewardship Act
(S. 342, S. 1151, and H.R. 759)
Larry Parker and Brent Yacobucci
Specialists in Energy and Environmental Policy
Resources, Science, and Industry Division
Summary
The Climate Stewardship Act (S. 342, S. 1151, and H.R. 759) would reduce
emissions of six greenhouse gases from anticipated levels beginning in 2010. Using a
flexible, market-based implementation strategy, the bills would require economy-wide
reductions, but permit participation in pre-certified international trading systems and in
carbon sequestration programs to achieve part of the reduction requirement. The bills
exclude residential and agricultural sources of greenhouse gases, along with entities that
do not own a single facility that emits more than 10,000 metric tons of carbon dioxide
equivalents annually.
As introduced, S. 342, S. 1151, and H.R. 759 would require that greenhouse gas
emissions from covered entities be limited to year 2000 levels. By restricting the
reduction regime to a single phase with a 2000 level target, S. 342, S. 1151, and H.R.
759 are projected to have substantially reduced costs compared with proposals to further
reduce emissions to 1990 levels. In June 2005, S. 1151 was debated on the Senate floor
as S.Amdt. 826, and defeated on a 38-60 vote. This report will be updated as warranted.
Overview of S. 342, S. 1151, and H.R. 759
In February 2005, Senators McCain and Lieberman introduced S. 342, the Climate
Stewardship Act of 2005. At the same time, Representatives Gilchrest and Olver
introduced H.R. 759, which is very similar to S. 342. The primary focus of the proposed
legislation is to reduce U.S. emissions of six greenhouse gases through the use of flexible,
market-based mechanisms. The six gases are carbon dioxide (CO ), methane (CH ),
2
4
nitrous oxide (N O), hydrofluorocarbons (HFC), perfluorocarbons (PFC), and sulfur
2
hexafluoride (SF ). They are the six gases covered by the United Nations Framework
6
Convention on Climate Change (ratified by the United States), and by the Kyoto Protocol
(not ratified by the United States). In May 2005, Senators McCain and Lieberman
introduced S. 1151, an expanded version of S. 342 that includes a new title designed to
encourage innovation and deployment of less carbon-intensive technologies, sequester
carbon emissions, or mitigate the effects of climate change.
Congressional Research Service ˜ The Library of Congress

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As summarized in Table 1, the bills would require mandatory and economy-wide
emission reductions. The focus is on domestic reductions; however, the bills do permit
participation in pre-certified international trading systems and allow use of carbon
sequestration to achieve part of the reduction requirement.
Table 1. Summary of the Climate Stewardship Act
Issue
Provision
Emissions Cap
Six greenhouse gas emissions (CO , N O, CH , SF , HFC, PFC) from
2
2
4
6
covered entities are capped at their 2000 levels beginning in 2010.
Covered Entities
In metric tons of carbon dioxide equivalents: any electric power,
industrial, or commercial entity that emits from any single facility
owned by the entity over 10,000 metric tons annually; any refiner or
importer of petroleum products for transportation use that when
combusted will emit over 10,000 metric tons annually; and any
importer or producer of HFCs, PFCs, or SF that when used will emit
6
over 10,000 metric tons.
General
A tradeable allowance system is established: EPA shall determine
Allocating and
allocations based on several economic and equity criteria, including
Implementing
efficiency and impact on consumers. Allowances are to be allocated
Strategy
upstream to refiners and importers of transportation fuel, along with
producers of HFCs, PFCs, and SF , and downstream to electric
6
generation, industrial, and commercial entities.
Other Market
Up to 15% of required reductions may be achieved through pre-
Trading System
certified international emissions trading programs, carbon
Features
sequestration, reductions from non-covered entities, and borrowing
against future reductions.
Bonus Credits
Entities that reduce emissions to their 1990 levels by 2010 receive
bonus allowances for six years. Entities are also allowed to achieve
20% of their reduction requirement during these six years through
international emissions trading, sequestration, or reductions by non-
covered entities. Under S. 1151, reductions achieved under more
stringent mandatory state programs are eligible for bonus allowances.
Banking
Banking of allowances is permitted.
Revenue
Revenue recycling to reduce consumer costs and to assist dislocated
Recycling
workers and affected communities, along with assistance with
deploying new technology, is provided through a Climate Change
Credit Corporation; however, the methodology and amount is
unspecified. S. 342 and S. 1151, but not H.R. 759, include assistance to
low-income persons and communities. Under S. 1151, at least 50% of
revenue received must be used for technology deployment.
Scope
The provisions cover the 50 states and the District of Columbia.
Penalty for non-
The bills establish an excess emission penalty equal to three times the
compliance
market price for allowances on the last day of the year at issue.

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Issue
Provision
Other Provisions
Provisions include studies of research on abrupt climate change; and
creation of a national greenhouse gas database, among others. S. 342
includes studies of technology transfer barriers and the impact on the
United States of the Kyoto Protocol; H.R. 759 includes a study on the
effects of climate change on coastal communities and ecosystems. S.
1151 creates a new Innovation Administration infrastructure and
program initiatives to promote less carbon-intensive technology,
adaption, sequestration, and related activities.
In the 109th Congress, S. 1151 was introduced as S.Amdt. 826 during the Senate’s
debate on the Energy Policy Act of 2005. S.Amdt. 826 was defeated on a 38-60 vote.
Emissions Projections
The flexibility provided in the bills, along with definitions that rely on future
regulatory proceedings, make quantifying the bills’ effects difficult. The legislation is
economy-wide and its market-based implementation strategy very flexible, including
bonus reduction credits, banking, international trading within limits, and carbon
sequestration within limits. Although criteria are given for allocating allowances, specific
allocations are not provided. Likewise, while revenue-recycling is provided for, most
details are left for regulatory action.
These variables are in addition to the general difficulty in estimating future effects
and costs. The emission limits do not take effect until 2010. Projecting emission trends,
technology development, economic growth, and other factors into the future is an
inherently uncertain business. The legislation’s economy-wide scope and flexibility add
to that uncertainty.
Current analyses of the Climate Stewardship Act were conducted on the version
introduced in the 108th Congress — S. 139. That bill contained several provisions not
included in S. 342, S. 1151, and H.R. 759. Most importantly, the current bills do not
include a second reduction phase — a phase that had significant impacts on projected
costs.1 As introduced, S. 342, S. 1151, and H.R. 759 are similar to phase 1 of S. 139, and
even more similar to S.Amdt. 2028 as debated on the Senate floor in 2003. Thus, this
discussion uses the analyses of phase 1 of S. 139, as well as analyses of S.Amdt. 2028, to
provide insight into the projected effects of S. 342, S. 1151, and H.R. 759.2
Most attempts to project the emissions effects of the proposed Climate Stewardship
Act focus on covered entities only. However, the studies conducted by the Energy
Information Administration (EIA) include projected emissions growth from non-covered
1 See archived CRS Report RS21637, Climate Change: Summary and Analysis of the “Climate
Stewardship Act” (S. 139/S.Amdt. 2028, and H.R. 4067), by Larry Parker and Brent Yacobucci
(available from the authors).
2 In addition to removing the second reduction phase, the number of covered entities would be
smaller under S. 342/S. 1151/H.R. 759 than under S. 139 of the 108th Congress, as introduced.
Thus, using these analyses may overstate the reductions achieved by S. 342/S 1151/H.R. 759 and
overstate the compliance costs.

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entities under S. 139 and S.Amdt. 2028.3 EIA’s estimates of U.S. emissions if S.Amdt.
2028 had been enacted are provided in Table 2.
Table 2. EIA Emissions Projections Under S.Amdt. 2028 Provisions
(millions of metric tonnes of carbon dioxide equivalents)
Year
Reference Case
S.Amdt. 2028
1990
6,131
6,131
2000
7,001
7,001
2010
8,177
7,622
Sources:
1990 and 2000 data: U.S. submission to the United Nations Framework Convention on Climate Change.
2010 projections: EIA, Analysis of Senate Amendment 2028, the Climate Stewardship Act of 2003, May
2004, p. 40. S.Amdt. 2028 is very similar to S. 342/S. 1151/H.R. 759 and is used as a surrogate here.
However, the number of covered entities may be less under S. 342/S. 1151/H.R. 759 than assumed
here, so the estimate may overstate reductions that would be achieved under S. 342/S. 1151/H.R. 759.
Mindful of the uncertainties noted above, Table 2 suggests that S. 342, S. 1151, and
H.R. 759 would reduce greenhouse gas emissions 6.7% below a “business as usual”
reference case. However, it is equally clear that S. 342, S. 1151, and H.R. 759 would not
achieve the voluntary reduction goal of stabilizing greenhouse gas emissions at 1990
levels that the United States agreed to at the 1992 United Nations Framework Convention
on Climate Change. Likewise, it would not meet the even more stringent 7% reduction
below 1990/1995 baseline levels mandated by the Kyoto Protocol that has entered into
force, but is unratified by the United States.
Cost Estimates
The same uncertainties surrounding emission projections affect cost estimates. The
legislation’s flexibility offers opportunities to achieve emission reductions at least-cost,
which also makes estimating those costs very difficult.
Once again using phase 1 of S. 139 and S.Amdt. 2028 as surrogates for S. 342, S.
1151, and H.R. 759, four relevant analyses of the Climate Stewardship Act have been
conducted with varying degrees of detail.4 They are:
3 Energy Information Administration, Analysis of S. 139, the Climate Stewardship Act of 2003,
SR/OIAF/2003-02/S (June 2003); EIA, Analysis of Senate Amendment 2028, the Climate
Stewardship Act of 2003 (May 2004).
4 A fifth analysis has been conducted by Charles River Associates (CRA) for The Tech Central
Science Foundation. However, its cost analysis and results are driven in large part by
assumptions about future tax policy, not direct compliance costs as with the analyses presented
here. As stated by CRA: “We find that the real-world tax considerations in our model [CRA’s
assumption that Congress would raise income taxes as a result of revenue losses under S. 139]
cause the full costs of a carbon policy to be about 60% higher than would be projected without
accounting for these effects. See Charles River Associates, The Full Costs of S. 139, With and
Without its Phase II Requirements, prepared for The Tech Central Science Foundation (October
27, 2003; corrected, April 2004), p. 40. For a critique of the CRA study, see Pew Center
(continued...)

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! 2004 EIA Study: Energy Information Administration, Analysis of S.A.
2028, the Climate Stewardship Act of 2003 (May 2004);
! MIT Study: Sergey Paltsev et al., Emissions Trading to Reduce
Greenhouse Gas Emissions in the United States: The McCain-Lieberman
Proposal [S. 139], Report No. 97 (June 2003);
! 2004 Tellus Institute Study: Alison Bailie and William Dougherty,
Analysis of the Climate Stewardship Act Amendment [S.Amdt. 2028],
conducted for NRDC (June 2004);
! RFF Analysis: William A Pizer and Raymond J. Kopp, Summary and
Analysis of McCain-Lieberman — “Climate Stewardship Act of 2003”
[S. 139] (January 28, 2003).
Table 3 provides a summary of those analyses in economic areas where two or more
of the studies have provided estimates. All of these studies provide a broad, macro-
economic perspective on the potential impacts of either phase 1 of S. 139 or S.Amdt.
2028. However, it should be noted that the EIA study’s cost estimates for S.Amdt. 2028
are substantially higher than those of the other studies listed above (for a critique of EIA’s
cost estimates, see the assessment by the Pew Center).5 Indeed, in contrast to the EIA
study, the Tellus Institute studies project household savings, not costs, resulting from
phase 1 of S. 139 and S.Amdt. 2028 in the out-years (2015, 2020). Major sources of these
differing conclusions are differing assumptions about the availability of (1) cost-effective
energy efficiency improvements, (2) cost-effective non-CO greenhouse gas reductions,
2
(3) cost-effective carbon sequestration and international credits, and (4) future natural gas
supply. With a program designed to achieve a least-cost solution through a market-based
allowance trading system, restricting options increases costs.
One factor not accounted for in these analyses is the Kyoto Protocol. With the Kyoto
Protocol entering into force in February 2005 for those countries who have ratified it,
regional trading programs and projects within developing countries are being
implemented. The prime example of these is the European Union’s Emission Trading
Scheme (EU-ETS). A major component of the EU’s Kyoto Protocol implementation
plan, the EU-ETS has traded carbon in the $9-$18 a tonne CO range for the period June
2
2003 to January 2005 in preparation for its full implementation in 2005.6 This range of
prices is similar to the range of allowances projected by the studies reviewed here for the
year 2010 (and later for all studies except EIA’s). The emergence of the EU-ETS has
several implications for the S. 342/S. 1151/H.R. 759 trading program, including (1)
potentially increasing the availability of cost-effective carbon credits (subject to the bills’
15% limitation), and (2) providing the United States with useful information on the
operation of a carbon trading scheme. Indeed, the existence of the EU-ETS and the
entering into force of the Kyoto Protocol may cause some to reassess S. 342/S. 1151/H.R.
759’s 15% limitation on international trading and carbon sequestration — a move that
could further reduce estimated costs.
4 (...continued)
Assessment of CRA Analysis of the Amended (S.A. 2028) Lieberman-McCain Climate
Stewardship Act (S. 139) [http://www.pewclimate.org/policy_center/analyses/assessmentcra.cfm].
5 Pew Center Assessment of EIA Analysis of the Climate Stewardship Act, available at
[http://www.pewclimate.org/policy_center/analyses/eia_analysis.cfm] and
[http://www.pewclimate.org/policy_center/analyses/neweia.cfm].
6 Pew Center on Global Climate Change, The European Union Emissions Trading Scheme (EU-
ETS): Insights and Opportunities (2005), p. 11.

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Table 3. Summary of Analyses
2004 Tellus
2004 EIA
MIT Study
Institute
Study
(scenario #12,
Year
Study
RFF Analysis*
(S.Amdt.
S. 139, phase 1
(S.Amdt.
2028)
only)
2028)
Allowance Price
2010
$15
$9
$9
$14
(2001$/metric ton CO )
2
2015
$23
$11
$13
$14
2020
$34
$14
$21
—
Annual Welfare Cost (or 2010
-0.2%
-0.02%
—
<-0.1%
Loss in Personal Income)
(%)
2015
—
-0.02%
—
<-0.1%
2020
-0.1%
-0.02%
—
—
Annual Welfare Cost (or 2010
-$20
-$1.8
-$5
-$9
Loss in Personal Income)
or Societal Benefits
2015
—
-$2.0
$17 (benefit)
-$9
(billions 2001$)
2020
-$7
-$2.4
$30 (benefit)
—
Annual Cost per
2010
$169
$15
—
$76
Household (2001$)
2015
—
$16
—
$73
2020
$55
$19
—
—
Oil Consumption (%
2010
-1.1%
-4.5%
-2.2%
—
change from reference
case)
2015
—
-6.3%
-6.1%
—
2020
-3.6%
-8.0%
-9.4%
—
Wellhead Natural Gas
2010
+$0.02
—
+$0.1
—
Prices (change from
reference in $/Mcf)
2015
—
—
-$0.1
—
2020
+$0.01
—
-$0.3
—
Electricity Prices
2010
+$0.04
—
+$0.007
—
(change from reference
in $/Kwh)
2015
—
—
+$0.007
—
2020
+$0.13
—
+$0.008
—
* RFF discussion of costs is based on EPA analysis suggesting 1.3 billion metric tons of domestic reductions are
available at about $14 a ton.
— Data either not calculated, not presented, or not presented in a form that an estimate could be determined with
sufficient precision (such as in the form of a graph).
Note: Phase 1only of S. 139 and S. Amdt 2028 is very similar to S. 342/S. 1151/H.R. 759 and is used as a
surrogate here. However, the number of covered entities may be less under S. 342/S. 1151/H.R. 759 than assumed here,
so these estimates may overstate actual costs involved in complying with S. 342/S. 1151/H.R. 759.