The American Power Act

Summary Analysis of Domestic and International Forestry Offset Provisions

On May 12, 2010, Senators Kerry (D-Massachusetts) and Lieberman (I-Connecticut) released a discussion draft of the "American Power Act" -- a bill that is the latest attempt at crafting legislation that can win 60 votes in the U.S. Senate. Following on the heels of two prominent climate bills in 2009 -- Waxman-Markey, which passed the House in June, and Kerry-Boxer, which was introduced in September but not brought to a vote -- Kerry and Lieberman's American Power Act includes a scaled back emissions trading scheme that could hold strong potential for domestic U.S. and international forests. The bill was released without the participation of Senator Graham (R-South Carolina), its most prominent Republican supporter who had worked for months on developing the bill with Kerry and Lieberman. Senator Graham's abandonment of the bill leaves it with a very low chance of being passed by the Senate in 2010, although it may be amended by committee chairmen and debated on the Senate floor in June and July. As such, it will likely be more of a place marker for future legislative efforts around climate change in the U.S. Congress.

Introduction

The American Power Act (APA) would feature a cap-and-trade program and other renewable energy measures to achieve greenhouse gas emissions from across the American economy. Cap-and-trade requires that covered entities surrender a volume of compliance instruments, either "allowances" or "offset credits," equivalent to its annual greenhouse gas emissions starting in 2013. The total volume of allowances in the system therefore creates a "cap," or maximum within the system, on emissions. To meet emissions reductions targets, the cap decreases over time. Offsets can be generated from projects that reduce emissions in sectors that are not regulated under the cap, such as forestry and agriculture. The APA would limit offset use at 2 billion tonnes per year, with a 500 million tonne limit on international offsets. The APA's program would include the power generation sector within the cap and impose a "linked fee" (per-tonne tax linked to allowance prices) on the liquid transportation fuels sector. Power generation and petroleum would be covered from the scheme's start in 2013, and large industrial sources and the natural gas sector would enter in 2016. The bill would impose a price collar with a minimum price of $12/tonne and a maximum price of $25/tonne, rising at the Consumer Price Index (CPI) plus 3% and 5%, respectively.

Domestic Forestry Offsets

Domestic offset language largely follows the Stabenow-Baucus bill, which has the support of many domestic forestry and agricultural groups. The domestic offset provisions are broadly acceptable to many industry and environmental stakeholders, but have lax permanence requirements as compared with international and some likely early action offset standards. The USDA will be the lead agency for agricultural and forestry offsets, and the EPA will lead all other offset project types. A number of domestic offset project types were mentioned in the bill, including from forestry: improved forest management, afforestation/reforestation, avoided conversion and harvested wood products. USDA will also develop regulations enabling aggregation for agricultural and forest offset project types. An interesting feature of the domestic offset provisions is the explicit allowance of "stacking," in which project lands can receive compensation or benefits from other conservation programs from the federal government and still sell offsets without risk of the offsets being considered non-additional. Eligible offset projects must avoid conversion of natural ecosystems to plantations and support biodiversity.

International REDD Offsets

International offsets would be based on sectoral crediting, as in the Kerry-Boxer bill. In addition, some offsets from the successor to the Clean Development Mechanism of the UNFCCC may be allowed in to the system. The most developed international offset thinking relates to Reducing Emissions from Deforestation and Degradation (REDD), which is also based on a sector-wide approach. In particular, there is guidance for the establishment of national or subnational (i.e., state or province-level) REDD programs. APA moves farther in this direction than the previous climate bills by removing language that was directly amenable to REDD interventions at specific sites, generally referred to as REDD projects. Although project-level REDD is not extensively supported in the APA, projects may still play a part in jurisdiction-level programs. This would be through so-called "nested REDD" arrangements, with projects being credited in the context of regional or national baselines, if the host jurisdiction reaches an agreement with the U.S. allowing such nested REDD crediting. In addition to REDD, the bill leaves the possibility open for other types of forest sector offsets allowed from developing countries. It is likely that host nations will have a primary focus on REDD given the momentum to date.

The core REDD structure under the APA is ex post crediting to nations, states or provinces for emissions reductions measured by actual emissions as compared to a national or subnational crediting baseline. There are a number of requirements for establishing the baseline, including that it consider any nationally appropriate mitigation actions (referred to as NAMAs within UNFCCC negotiations) and establish a trajectory that would result in zero-net deforestation within 20 years. Effectively, these stipulations require that REDD host areas achieve a committed level of reductions in deforestation emissions before "market-linked" crediting is allowed. Support for such pre-market reductions might come from international aid, or it might be financed internally by the developing country. Initially, credits can be issued to states and provinces for only five years after the initiation of the program, and host countries must transition to national-level REDD after this five-year window; alternatively, developing countries can start with national-level programs if the needed capacity is in place. If there are any applicable UNFCCC standards for REDD credits under a post-Kyoto treaty, the U.S. is required to accept only REDD credits that meet such standards. As in the Waxman-Markey and Kerry-Boxer bills, U.S. agencies are required to create a list of nations, states and provinces that are eligible to receive REDD credits. One key eligibility criterion is the elaboration of a forest sector plan in consultation with indigenous and forest-dependent communities. The bill also contains extensive language on environmental and social protections and requirements for transparency.

REDD credits will also play an important role in the architecture of the program. An allowance reserve would be established to keep prices below a fixed maximum price; this reserve would be replenished in part through the purchase of international REDD credits. Unlike the 2009 federal climate bills, the APA does not guarantee a "set-aside" of allowances to fund REDD capacity building and preparations in developing countries. In other words, the bill does not require that funds be set aside for international REDD capacity development but does allow for such funding through annual budget appropriations. The U.S. government's pledges through the Oslo-Paris partnership and elsewhere could be met through appropriating money for the above program or through funding other programs authorized by other legislation.

Early Action Provisions

The early action language in the APA is similar in many respects to the Stabenow language; it would require regulatory and voluntary programs to apply for approval before projects registered with those programs could exchange offsets issued by those programs for compliance offsets. No program is automatically grandfathered, and each program would need to apply to the EPA for approval. There is also a program allowing the exchange of certain pre-2009 vintage offsets for allowances for a limited time. Pending application by the eligible program and EPA approval, early offset supply provisions would likely enable projects registered with the American Carbon Registry, the Climate Action Reserve and the Voluntary Carbon Standard to exchange voluntary credits for compliance offsets for a period of ten years.

Conclusion

In general, the Kerry-Lieberman bill's prospects mirror the challenges facing policy makers in other countries and internationally in reducing greenhouse gas emissions and putting a price on carbon. It is unlikely to pass this year. If the APA does not pass, a separate energy bill without a carbon cap might be possible. In addition, if no U.S. federal bill is likely in the immediate future, a multi-region offset market could emerge that links the Western Climate Initiative, the Northeast's Regional Greenhouse Gas Initiative and the Midwest Greenhouse Gas Reduction Accord. Regardless of the bill's prospects of passing the Senate, the APA could provide a marker for future U.S. legislative efforts on greenhouse gas emissions. As such, its provisions for domestic and international forestry efforts to play a strong role in meeting climate targets are significant. REDD is a prominent feature of APA; however, the role for private sector involvement is not clear given the current focus on government-led programs and jurisdiction-level baselines that are dependent on public action to reach crediting baselines. U.S. forests could be exposed to significant demand for forest carbon based offsets, but the opportunity to realize carbon revenue will depend on the USDA's regulations and the Administrator's approval of voluntary offset programs and protocols. In the case of both international and U.S. forests, the further elaboration of offset guidance and the implementation of offset programs will greatly shape the opportunity facing landowners and timberland investors.

Note: Commentary is current as of June 2010. Reproduction is permitted with proper referencing to New Forests Advisory Inc, San Francisco, California, USA