By Jessica Wentz

The Kerry-Lieberman bill addresses international competitiveness in Title IV, Subtitle A, covering §§ 771-778 and starting on page 782, entitled “Protecting American Manufacturing Jobs and Preventing Carbon Leakage.” The provisions in this Subtitle amend Title VII of the Clean Air Act, creating two programs to protect American manufacturers, prevent an increase in greenhouse gas emissions in foreign countries, and promote a strong global effort to significantly reduce greenhouse gas emissions.

The two programs created in this section are: (1) an Emission Allowance Rebate Program, which compensates vulnerable industrial sectors for costs incurred as a result of compliance with Title VII of the Clean Air Act, and (2) an International Reserve Allowance Program, which would effectively impose a carbon tariff on imports from countries that do not make similar efforts to reduce their greenhouse gas emissions.

I. Emission Allowance Rebate Program

Subpart 1 of Subtitle A, covering §§ 773-774, establishes a program that rebates emission allowances to eligible industrial sectors to compensate these sectors for costs incurred as a result of compliance with Title VII of the Clean Air Act.

The program has three main purposes: (1) to compensate trade-sensitive and energy-intensive entities for costs incurred under Title VII, but not for costs associated with other related or unrelated market dynamics, (2) to design rebates in a manner that will prevent carbon leakage while also rewarding innovation and facility-level investments in energy efficiency performance improvements, and (3) to eliminate or reduce distribution of emission allowances under this Part when the distribution is no longer necessary to prevent carbon leakage. § 771(a).

A. Selection of Eligible Industrial Sectors

Section 773 provides guidelines for how eligible industrial sectors will be chosen. The purpose of these guidelines is to identify sectors that are energy-intensive and trade-sensitive.

This section requires the Administrator to determine which sectors and subsectors should be eligible for rebates, by making rules based on an assessment of the energy and greenhouse gas intensity of each sector and the trade intensity of each sector. The Administrator is then required to publish a list of eligible sectors every 4 years, which will include the amount of emission allowance rebate per unit of production that shall be provided to eligible entities. § 773(a).

An industrial sector’s energy intensity is calculated by dividing the cost of purchased electricity and fuel costs of the sector by the value of shipments of the sector. Greenhouse gas intensity is calculated by dividing the number of tons of carbon dioxide equivalent greenhouse gas emissions of the sector, multiplied by twenty, by the value of shipments in the sector. Trade intensity is calculated by dividing the value of the total imports and the exports of the sector by the value of the shipments plus the value of imports of the sector. § 773(b)(2)(A).

An industrial sector is presumptively eligible for rebates if it is included in the 6-digit classification of the North American Industry Classification System (NAICS), and (a) the energy intensity or greenhouse gas intensity is at least 5%, and the trade intensity is at least 15%, or (b) if the energy or greenhouse gas intensity is at least 20% (in which case trade intensity is irrelevant). § 773(b)(2)(A).

The Administrator is required to designate additional eligible sectors when they meet the requirements above. The owner or operator of an entity or group of entities that collectively produce at least 80% of the average annual value of shipments in a sector may petition the Administrator for eligibility, if the sector meets the general eligibility requirements. The Administrator is required to take final action on a petition within 180 days of receiving the petition. § 773(b)(3)(B)(iv).

The section specifies that, for the purposes of this program, petroleum refining is not to be considered an eligible industrial sector. § 773(b)(2)(C). Petroleum refiners are subject to separate criteria for receiving emission allowance rebates, pursuant to section 796, as discussed below.

B. Distribution of Rebates

Section 774 contains provisions for the distribution of emission allowance rebates. The Administrator is directed to make annual distributions of allowance rebates to the owners and operators of each entity in an eligible industrial sector, in an amount calculated according to the subsection (b) guidelines. § 774(a). The bill restricts how many rebates are permitted under these calculations by limiting the percentage of total allowances that may be distributed as rebates. From 2016-2026, the Administrator may distribute up to 15% of total allowances as rebates. Two periods (2014-2015, 2026 and thereafter) rely on different calculations, and are discussed below. Starting in 2026, the permitted proportion of rebates to total allowances decreases until 2030, at which point the rebate program ends.

Subsection (b) specifies that, from 2016-2026, emission allowance rebates must be calculated based on direct and indirect carbon factors. For covered entities in an eligible sector, the quantity of rebates is calculated as the sum of the direct and indirect carbon factors of that covered entity. § 774(b). Covered entities include electricity sources, refined product providers, and any other source that produces or imports at least 25,000 metric tons of GHG emissions annually. § 700(12). For non-covered entities in an eligible sector, the amount of the emission allowance rebates is based only on the indirect carbon factor of the entity. § 774(b).

The direct carbon factor for any year is equal to product obtained by multiplying the average annual output of the entity for 2 years preceding the year of distribution, and the most recent calculation of the average direct greenhouse gas emissions per unit of output for all covered entities in the sector. § 774(b)(2). The Administrator is responsible for calculating this average, every four years, using an average of the 5 most recent years of best available data. § 774(b)(4).

The indirect carbon factor is equal to the product obtained by multiplying the average annual output of the entity for 2 years preceding the year of distribution, the electricity emissions intensity factor, and the electricity efficiency factor. The electricity emissions intensity factor is calculated by dividing the annual sum of the hourly product (electricity purchased by entity each hour, in kilowatt hours, multiplied by marginal or weighted average tons of carbon dioxide equivalent per kilowatt hour) by the total kilowatt hours of electricity purchased by the entity during the year.  The electricity efficiency factor is equal to the average quantity of electricity used per unit of output for all entities in the relevant sector. § 774(b)(3).

If an electricity provider receives a free allocation of emissions allowances, the Administrator is required to adjust the indirect carbon factor to avoid rebates to the eligible entity for costs that the Administrator determines were not incurred by the eligible entity because the allowances allocated to the electricity provider were used for the benefit of the industrial consumers. § 774(b)(3)(D).

There are two exceptions to these guidelines: for each of vintage years 2013-2015, the distribution for a covered entity is equal to the indirect carbon factor of the entity. § 774(a)(2)(A). During this period, rebates may be awarded for no more than 2% of total emissions allowances. § 781(b)(1)(A). For vintage year 2026 and each vintage year thereafter, the total quantity of permitted rebates is equal to the percentages of total emissions allowances specified in the table below. § 781(b)(1)(A).

Year % of Allowances
2026 12.0
2027 9.0
2028 6.0
2029 3.0

After 2029, rebates are no longer available for energy-intensive, trade-exposed industries.

The Administrator is responsible for identifying sectors or subsectors for the purposes of calculating rebates and sector averages, based on the intermediate and final products produced, and extent of use of combined heat and power technologies. §774(b)(5). The section specifies particular rules for identifying subsectors of entities that use or produce iron, steel, metal, soda ash, and phosphate. § 774(c),(d).

Owners and operators of entities in newly eligible sectors are entitled to receive a prorated share of any emission allowances made available for distribution under this section, that were not distributed for the year in which the petition for eligibility was granted. § 774(a)(4). If, as determined by the Administrator, an entity is no longer in an eligible sector, then the Administrator is instructed to not distribute emissions allowances to that entity, and the owner or operator of the entity must return to the Administrator all allowances that have been distributed for future years, as well as a prorated amount of allowances distributed for the current year in which the entity ceases to be eligible. § 774(a)(5).

II. International Reserve Allowance Program

Subpart 2 of Subtitle A, containing §§ 775-778, is entitled “Promoting International Reductions in Industrial Emissions.” This subpart provides guidelines for establishing an International Reserve Allowance Program, which would require importers of covered goods to pay international reserve allowances in an amount covering the greenhouse gas emissions associated with the manufacture of the imported goods. Covered goods would include imports in specified sectors that meet two requirements: (1) the goods are manufactured in a country without comparable emissions reduction programs, and (2) 70% or less of the sector’s global production is located in countries with comparable emissions reduction programs. The program is to be implemented by the President and EPA Administrator, commencing no earlier than 2020.

The purpose of Subpart 2 is to ensure that foreign countries, in particular fast-growing developing countries, take substantial action to limit their greenhouse gas emissions consistent with the commitments listed in the Copenhagen Accord and the United Nations Framework Convention on Climate Change. § 771(c). The section articulates a finding by Congress that this purpose is most effectively addressed and achieved through agreements negotiated between the United States and foreign countries. The section states that it is the policy of the United States to work proactively under the United Nations Framework Convention on Climate Change and other appropriate forums, to establish binding agreements that will commit all major greenhouse gas-emitting nations to contribute equitably to the reduction of greenhouse gas emissions. § 775(a).

A. Presidential Reports and Determinations

The President is required to provide, as soon as possible, a notification to each foreign country (which is not exempt under section 777, see below), consisting of a statement of the policy of the United States, described above, and a declaration requesting the foreign country to take appropriate measures to limit its greenhouse gas emissions, and indicating that the international reserve allowance requirements may apply to a covered good in that sector. § 775(c).

No later than January 1, 2019, and every two years thereafter, the President is required to submit to Congress a report on the effectiveness of the Emission Allowance Rebate Program in mitigating carbon leakage in eligible industrial sectors. This report must contain an assessment for each sector as to whether, and by how much, the per unit cost of production has increased for that sector as a result of compliance with the Clean Air Act, taking into account the provision of emission allowance rebates and any benefit received from the provision of free allowances to electricity providers. § 776(a).

The bill also requires that this report contain recommendations on how to better achieve the purposes of Subpart 2, including an assessment of the feasibility and usefulness of an International Reserve Allowance Program for an eligible sector under section 777. Where the President determines that this program would not be useful for an eligible sector, the President is directed to implement alternative actions or programs consistent with the purposes of Subpart 2. Finally, the report must contain an assessment of the quantity and duration of assistance, including distribution of free allowances, being provided to industrial sectors in other developed countries to mitigate costs of compliance with domestic greenhouse gas reduction programs in the countries. § 776(a).

Section 776(b) instructs the President to establish an International Reserve Allowance Program if a multilateral agreement consistent with the statement of policy described in section 775 has not entered into force by January 1, 2020, unless the President determines that such program would not be in the national economic or environmental interest of the United States. § 776(b).

B. Determinations With Respect to Eligible Industrial Sectors

If the President establishes an International Reserve Allowance Program, section 776 requires the President, in consultation with the Administrator and other appropriate agencies, to make a determination as soon as possible, but no later than June 30, 2023, and every two years thereafter, for each industrial sector, whether or not more than 70% of global production with respect to that sector is produced or manufactured in countries that have met one or more of the following criteria:

(1) the country is party to an international agreement with the United States, which includes a nationally enforceable and economy-wide greenhouse gas emissions reductions commitment for that country that is at least as stringent as the requirements of the Clean Air Act

(2) the country is party to an emission reduction agreement for the specific sector, to which the United States is a party

(3) the country has an annual energy or greenhouse gas intensity, as described in section 773, for the sector that is equal to or less than the energy or greenhouse gas intensity for the same sector in the United States, during the most recent calendar year for which data is available. § 776(c).

Where the President determines that more than 70% of the sector’s global production takes place in countries that meet one or more of those requirements, then the President may not apply an International Reserve Allowance Program with respect to imports of covered goods in that sector. § 776(d)(2).

Where the President determines that 70% or less of the sector’s global production takes place in countries that meet one of more of those requirements, then he is required to assess the extent to which emission allowance rebates, and the benefits received by provision of free allowances to electricity providers, have mitigated or could mitigate carbon leakage in that sector, as well as the extent to which an International Reserve Allowance Program has mitigated or could mitigate carbon leakage in that sector. The President is then required to mitigate and address carbon leakage either by increasing the percentage by which direct and indirect carbon factors will be multiplied under section 774(a)(2)(B), effectively increasing the emission allowance rebate to that sector, or by applying an International Reserve Allowance Program with respect to imports of covered goods in that sector. § 776(d)(1).

The President is required to report to Congress once the first determination with respect to eligible industrial sectors has been made, and every 2 years thereafter, by submitting a report that provides notice of the determination, describes reasons for the determination, and identifies the actions taken by the president under subsection (d).        § 776(e).

The bill stipulates that the President may elect not to establish an International Reserve Allowance Program for an eligible industrial sector if the President determines and certifies to Congress that the program would not be in the national economic interest or environmental interest of the United States. § 777(e)(1). If the President elects not to establish the program, then he is required to make available additional emission allowance rebates to the sector as is necessary to mitigate carbon leakage.

C. Establishing the International Reserve Allowance Program

Section 777 directs the Administrator, with the concurrence of the Commissioner of Customs, to promulgate regulations establishing an International Reserve Allowance Program. The section requires that the regulations be designed to:

(1) permit the sale, exchange, purchase, transfer and banking of international reserve allowances

(2) ensure the price for purchasing international reserve allowances from the United States is equivalent to the auction clearing price for emission allowances under §722

(3) establish a general methodology for calculating the quantity of international reserve allowances that a United States importer of any covered good must submit

(4) require the submission of appropriate amounts of such allowances for covered goods that enter the customs territory of the United States,

(5) specify procedures that the Commissioner will apply for the declaration and entry of covered goods

(6) establish procedures that prevent circumvention of the international reserve allowance requirement for covered goods that are manufactured or processed in more than 1 country.  § 777(a).

Products are exempt from the allowances if they originate from any country that the President has determined meets any of the three standards provided in section 776(c) (see above), or that the UN has identified as among the least developed of developing countries, or that the President has determined to be responsible for less than 0.5 percent of total global greenhouse gas emissions and less than 5 percent of global production in the eligible industrial sectors. § 777(a)(5).

III. Additional Provisions

Section 778 instructs the Administrator to consider, as part of the same eligible industrial sector, entities using integrated iron and steel making technologies and entities using electric arc furnace technologies.

Section 796, amending Part G of title VII of the Clean Air Act, contains provisions regarding the distribution of emission allowance rebates to petroleum refineries in the United States. It stipulates that, for each of vintage years 2013 through 2026, the Administrator shall distribute rebates to owners and operators of petroleum refineries in the United States. To calculate these rebates, the Administrator is instructed to determine an individual allocation factor for each petroleum refinery, equal to the refinery’s intensity factor multiplied by its production factor, and the total allocation factor based on the sum of all of the individual allocation factors. The number of emissions allowances to be provided to each petroleum refinery is obtained by dividing the individual allocation factor by the total allocation factor, and then multiplying that quotient by the number of emission allowances allocated to the program under this section for the vintage year.

IV. Comparison to Waxman-Markey

The Waxman-Markey (WM) bill addresses international competitiveness in Title IV, Subtitle A, entitled “Ensuring Real Reductions in Industrial Emissions,” covering §§ 761- 769. The provisions in this subtitle are almost identical to the provisions in the Kerry-Lieberman (KL) bill, but there are a few changes that make the KL bill less restrictive on international trade than the WM bill. Specifically, the KL bill phases out emissions rebates faster and it reduces the number of industrial sectors eligible for the international reserve allowance program.

The requirements for distributing emission allowance rebates after 2026 are slightly different between the two bills. In the WM bill, the Administrator is instructed to determine the allocation of allowance rebates by multiplying the subsection(b) calculations by decreasing percentages (90% for 2026, 80% for 2027, 70% for 2028, etc.). In the KL bill, the Administrator is instructed to allocate rebates up to a specified percentage of the total emissions allowance (12% in 2026, 9% in 2027, 6% in 2028, etc.). Thus, both bills seek to phase out the allowance rebates starting in 2026, but the KL bill phases out the rebates more quickly. Whereas the WM bill permits rebates until 2035, the KL bill terminates the program in 2030.

The requirements for the international reserve allowance program are also different in the WM bill. The KL bill specifies that industrial sectors are eligible for the program if 70% or less of the sector’s global production takes place in countries that meet one of the three emissions standards specified in section 776(c). In contrast, the WM bill requires that 85% or less of the global production take place in such countries. By lowering this percentage, the KL bill reduces the number of imports that will be covered by the program and is therefore less restrictive on international trade than the WM bill.

Finally, the KL bill updates the WM bill by creating additional provisions to address the distribution of emission allowance rebates to petroleum refineries in the United States. § 796.

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