You asked for a summary of the climate change bill recently passed by the U. S. House (H. R. 2454) and a discussion of its possible implications for Connecticut. The bill's text is available at http: //thomas. loc. gov. The bill is now on the Senate calendar.

Much of the information in this report is taken from analyses prepared by the Congressional Research Service and the Congressional Budget Office (CBO).

SUMMARY

The bill caps the amount of greenhouse gases (GHGs) emitted by electric generation facilities, natural gas utilities, and certain industrial activities over the 2012-2050 period. Under the bill, the Environmental Protection Agency (EPA) must establish two cap-and-trade programs—one covering carbon dioxide and five other GHGs and one covering hydrofluorocarbons, another type of GHG. EPA must issue allowances to emit the gases under the cap-and-trade programs. The federal government would auction some of the allowances and allocate the remainder at no charge. The bill allows an entity that is subject to its requirements to meet part of its obligation by purchasing domestic or international offsets in lieu of purchasing an allowance. It provides refundable energy tax credits and energy rebates for low- to moderate-income families to offset higher energy-related prices resulting from the cap-and-trade programs. In addition, part of the allocated allowances go to State Energy and Environment Development Accounts, which must be used to fund conservation and renewable energy programs, among other things.

The bill also requires electric utilities to meet a minimum percentage of their demand from electricity generated by facilities that use qualifying renewable fuels or savings from efficiency programs. This provision is known as the renewable electricity standard (RES).

The bill has many energy efficiency provisions, including requirements for increased energy efficiency in building codes and efficiency standards for certain lighting fixtures and appliances.

The bill has many other provisions not discussed in this report. It:

1. establishes a Clean Energy Deployment Administration in the Department of Energy (DOE), and authorizes it to provide loans, loan guarantees, and letters of credit for clean energy projects;

2. establishes a research corporation to support research and development of technologies related to carbon capture and sequestration;

3. establishes carbon dioxide emission limits for new coal-fired power plants;

4. increases, by $ 25 billion, the amount of loans DOE may make to automobile manufacturers and component suppliers under the existing Advanced Technology Vehicle Manufacturing Loan Program;

5. authorizes the Department of Transportation to provide vouchers to individuals who acquire new vehicles that achieve greater fuel efficiency than their existing qualifying vehicles (this provision is commonly called “cash for clunkers”); and

6. creates a program to compensate workers who lose their jobs as a result of the bill's provisions.

The bill also addresses, among other things, electric transmission planning, nuclear power, energy research and development, measures to promote “smart grids”, and commodity market regulation of trade in the allowances.

The bill has several potential policy implications for the state. Its cap-and-trade programs temporarily supersede the Regional Greenhouse Gas Initiative (RGGI) cap-and-trade program that Connecticut currently participates in. While the program created under the bill is similar to RGGI, there are several key differences. RGGI currently only affects emissions from electric generators, while the program created under the bill covers other sectors of the economy. Most allowances under RGGI have been auctioned. In contrast, most allowances under H. R. 2454 are allocated to generators and other “covered entities” in the program's early years. The bill's RES is similar to Connecticut's existing renewable portfolio standard, which the bill does not preempt. Connecticut's standard is generally stricter than that contained in the bill. H. R. 2454 also sets several appliance energy efficiency standards that preempt those set in state law. It also requires the state to adopt building codes with higher energy efficiency standards for residential and commercial buildings.

We have found no state-specific estimates of the bill's costs and benefits. CBO estimates that nationally, the bill's cap-and-trade provisions would have a total economic cost of about $ 22 billion per year by 2020 or $ 175 per average household. The estimated cost of these provisions on households varies by income. CBO did not estimate the costs avoided by reducing the impacts of climate change. Other sources have argued that the bill could cost substantially more.

There are many uncertainties that affect the bill's impacts. These include the future price of auctioned allowances, the amount of GHG emission reductions achieved by the bill's energy efficiency provisions, how the RES would interact with programs such as Connecticut's renewable portfolio standard, and the feasibility of carbon sequestration, among other things.

H. R. 2454

Cap and Trade Programs

Scope and Timing. The bill designates carbon dioxide, methane, and hydrofluorocarbons, among others, as GHGs and establishes a carbon dioxide equivalent value for each gas. It amends the Clean Air Act to require the EPA administrator to promulgate regulations to: (1) cap and reduce annual GHG emissions so that emissions from capped sources are reduced to 97% of 2005 levels by 2012, 83% by 2020, 58% by 2030, and 17% by 2050; and (2) establish a federal GHG registry.

The cap-and-trade program begins in 2012 for (1) electric generators, other than those that use liquid fuels, coke, and renewable biomass and (2) entities that produce or import liquid fuels or coke, based on the GHG

emissions that would result from burning these fuels. The program begins in 2014 for industrial facilities that manufacture a wide variety of products or that burn fossil fuels. It begins in 2016 for large natural gas utilities.

Allowances. The bill requires the EPA administrator to establish specified emission allowances (annual tonnage limits) for: (1) each year between 2012 and 2049; and (2) 2050 and thereafter. It phases in prohibitions against covered entities exceeding allowable emission levels. It requires covered entities to demonstrate compliance through: (1) holding emission allowances at least as great as attributable emissions, as specified; or (2) using offset credits. It establishes penalties for noncompliance.

It provides for trading, banking and borrowing, auctioning, selling, exchanging, transferring, holding, or retiring emission allowances. The bill does not restrict who can purchase, hold, exchange, or retire emission allowances under the program. An unlimited number of allowances obtained in one year may be saved or banked by market participants to be used or sold in future years. Covered entities may borrow their allowances one year in advance; limited borrowing of allowances two to five years in advance is also permitted.

Initially, the bill allocates about 97% of the allowances to covered entities. The remainder of the allowances would be auctioned. The number of allocated allowances increases over time to account for covered entities that are brought under the cap-and-trade program, and then declines by 100 million to 150 million metric tons of carbon dioxide equivalent per year until 2050, when the allocations account for about 14% of projected emissions from covered entities in the absence of regulation of GHG emissions. The bill also requires EPA to create a “strategic reserve” of about 2. 7 billion allowances by setting aside a small number of allowances authorized to be issued each year. EPA would auction allowances from its strategic reserve only if the market price of allowances rose to unexpectedly high levels.

The bill has specific allocations of emission allowances: (1) to benefit utility, home heating oil, and propane consumers; (2) for auction, with proceeds benefiting low income consumers and worker investment; (3) to energy-intensive industries subject to foreign competition; (4) for the deployment of carbon capture and sequestration technology; (5) to invest in energy efficiency and renewable energy programs; and (6) for various climate change adaptation programs. About $ 50 billion in allowances would be provided to states from 2012 to 2016 for specific purposes, including programs for improving energy efficiency, implementing regulations, and supporting other climate change programs. In the period 2011 to 2019 another $ 900 million would go to a fund that would primarily support efforts by the Department of Health and Human Services to assist health professionals prepare for and respond to the impacts of climate change on public health.

Offsets. The bill allows an entity that is subject to its requirements to meet part of its obligation by purchasing domestic or international offsets in lieu of purchasing an allowance. An offset is created by activities, as certified by EPA, that are not directly related to the emissions of the facilities covered under the bill, that reduce GHG emissions or increase the amount of such gases that are captured from the atmosphere and stored (sequestration). Examples of offset activities include reducing emissions of methane gas from solid waste landfills and sequestering GHGs in forests.

Under the bill, such offsets could occur domestically or in another country if the United States is a party to an agreement with that country. The international agreements must specify the types of qualifying projects and methods for verifying the validity of offset activities. The bill allows up to 2 billion tons of offsets to be used for compliance (1 billion from domestic sources and 1 billion from international sources). For international offsets, beginning in 2018, 1. 25 offset credits would be required to be surrendered for each ton of emissions; there is no discount for domestic offsets. If domestic supply is insufficient, EPA can raise the international limit to 1. 5 billion, subject to the 2 billion total. EPA must determine the list of eligible offset projects based on recommendations from the Offsets Integrity Advisory Board that is created by the bill.

Tax Credits and Rebates. The bill creates a refundable energy tax credit and rebate program to offset the impact of the cap-and-trade program on energy prices. The credit is based on the average loss of purchasing power for the poorest fifth of people caused by higher prices for energy and other goods. The credit varies with family size, based on the average spending for families of different sizes at the bottom of the income scale. The credit amount is calculated using the share of total expenditures made by these families, the GHG intensity of that spending, the amount of other relief provided to consumers under the bill, and how much of recipients' reduced purchasing power would be automatically offset by federal cost-of-living adjustments in other federal benefit programs.

Only taxpayers with income below certain levels would receive the credit. In 2012, CBO estimates that single people with no children would be eligible if their income did not exceed $ 23,000, while families with at least two children would be eligible if their income did not exceed $ 42,000. The credit would be refundable, meaning that taxpayers would not need to owe any tax in order to receive the credit. Taxpayers participating in the energy rebate program for low-income consumers would not be eligible for that credit.

The bill would create a new energy rebate, aimed at offsetting the impact of the GHG cap-and-trade program on energy prices for low-income families. The rebate would complement the low-income energy tax credit program, reaching families who may not file tax returns. The rebate amount would be the same as the tax credit. Like the credit, the

rebate would vary with family size. In 2012, CBO estimates the rebate would be $ 161 for a single person, ranging up to $ 359 for a five-person household. By 2019, those credit amounts would rise by roughly 75%.

Families who participate in the Supplemental Nutrition Assistance Program or Medicare Part D would automatically be enrolled in the rebate program. Other families with income below 150% of the poverty level could apply for the rebates through their state benefit agencies. Families would not be eligible to receive both the rebate and the tax credit.

State Energy and Environment Development Accounts. The bill requires EPA to establish these accounts to serve as state-level repositories for managing and accounting for the emission allowances allocated to states for renewable energy and energy efficiency purposes. The bill requires that 40% these allowances be used for such things as implementing energy efficient building regulations, funding energy efficiency programs in low-income communities, and establishing and expanding renewable energy manufacturing facilities. States must distribute 12. 5% of the allowances to local governments for their renewable energy and efficiency programs. The remaining 47. 5% can be used for a wide range of purposes, including certain public transportation projects as well as energy efficiency and renewable energy programs.

Other Provisions. Under a separate program, beginning in 2012, producers and importers of hydrofluorocarbons, and importers of products containing hydrofluorocarbons, must submit allowances for the carbon dioxide-equivalent tons of hydrofluorocarbon they produce or

import. CBO estimates that this program, combined with the program described above, would cover about 72% of U. S. emissions of GHGs in 2012, about 78% in 2015, and about 86% in 2020.

The bill prohibits states from implementing a cap and trade program that covers any capped emissions emitted during 2012-2017. It provides for compensation for entities that bought allowances under RGGI and similar regional programs. The compensation is set at the average auction price for emission allowances issued in the year in which the allowance was issued under the program under which it was issued.

Renewable/Efficiency Portfolio Standard

The bill establishes a combined renewable energy and efficiency electricity standard that requires electric utilities to meet an increasing percentage of their demand from renewable energy or energy efficiency savings. The standard is 6% in 2012, 9. 5% in 2014, 13% in 2016, 16. 5% in 2018, and 20% in 2021-2039. Normally, the utility must achieve 75% of these targets from renewable energy (thus, in 2012, at least 4. 5% of a utility's demand must be met from renewable resources, and up to 1. 5% of the demand can be met through efficiency savings). But a state can petition the Federal Energy Regulatory Commission to increase the proportion of the standard that can be met through energy efficiency from 25% to 40%. The bill also provides a bonus for renewable energy used in distributed (on-site) generation systems. Generation from (1) fossil-fueled units where the carbon dioxide emissions are sequestered, (2) new nuclear plants, and (3) certain hydropower facilities are excluded from the utility's base in calculating these amounts, thereby making it easier to achieve the standard. The standard does not apply to small utilities, i. e. , those selling less than 4 million megawatt-hours at retail per year.

The bill provides for: (1) issuing, trading, banking, retiring, and verifying renewable electricity credits (RECs) produced by renewable energy projects; and (2) prescribing standards to define and measure electricity savings from energy efficiency and energy conservation measures. One federal REC is created for each megawatt hour (MWH) of electricity generated from a renewable energy source.

To meet the bill's requirements, utilities must (1) generate qualifying renewable power or achieve energy savings, (2) purchase RECs from other firms, or (3) make alternative compliance payments to the state in which they operate. If a utility does not have enough RECs or sufficient reductions in customers' electricity consumption to comply with the standard, it may choose to remit alternative compliance payments to the state where it operates equal to $ 25 per MWh needed to meet its compliance requirement (the payment level must be adjusted annually for inflation). States must use revenue from these payments to support the deployment of renewable energy technologies and implement energy efficiency programs.

Energy Efficiency

The bill establishes new programs and requirements aimed at improving the efficiency of lighting, energy use in buildings, and other sectors of the economy. CBO estimates that fully funding these provisions, which include a wide array of grants and other forms of assistance to nonfederal entities, would require $ 6. 7 billion from 2010 to 2019. This includes $ 3. 1 billion for activities to increase lighting efficiency; $ 2. 1 billion to improve the energy efficiency of buildings; and $ 1. 5 billion for energy-efficiency programs aimed at industry and certain state and local governments, and for other related activities.

The bill requires DOE to set a national building code energy efficiency target to improve a new building's energy performance when built to a code to meet the following targets:

1. effective on the bill's enactment date, a 30% reduction in energy use relative to a comparable building complying with the baseline code (the 2006 International Energy Conservation Code for residential buildings and ASHRAE Standard 90. 1-2004 for commercial buildings);

2. a 50% reduction in energy use relative to the baseline code effective January 1, 2014 for residential buildings and January 1, 2015, for commercial buildings; and

3. a 5% additional reduction in energy use relative to the baseline code effective January 1, 2017 for residential buildings and January 1, 2018, for commercial buildings, and every 3 years thereafter through January 1, 2029, and January 1, 2030, respectively.

DOE must adopt a code sufficient to meet each of the targets within one year after each target's effective date, except that the code established to meet the initial residential target must be established within 15 months after the effective date of that target.

Within one year after a national energy efficiency building code for residential or commercial buildings is established or revised under the bill, each state with a statewide building code (e. g. , Connecticut) must (1) review and update the provisions of its building code regarding energy efficiency to meet or exceed the target met in the new national energy efficiency building code, to achieve equivalent or greater energy savings or (2) adopt the new national code. There are similar requirements for states where building codes are adopted by local governments.

States that do not comply with these requirements face a loss of some of their allocated allowances and certain federal grant funding.

The bill has several other green and energy efficiency housing programs and initiatives. After the secretary of Housing and Urban Development (HUD) determines standards for energy efficiency and other green attributes for HUD-related buildings, he must develop energy efficient building demonstration projects for multi-family assisted housing projects. The provision enhances Fannie Mae and Freddie Mac energy-efficient mortgage offerings, authorizes energy-efficient mortgages for underserved areas, and creates an education and outreach program. Other provisions provide for energy efficiency support to manufactured homes, an energy efficiency block grant program, and sustainable development and transportation strategies.

POSSIBLE IMPLICATIONS FOR CONNECTICUT

Policy

Cap and Trade Programs. Connecticut already participates in the 10-state RGGI cap-and-trade program. In addition to Connecticut, RGGI includes the other New England states, New York, New Jersey, Maryland, and Delaware.

While the system created under H. R. 2454 is similar to RGGI, there are several key differences. As noted above, the system created in the bill addresses GHG emissions across several sectors of the economy. In contrast, RGGI is initially concentrating on carbon dioxide emissions from power plants with a capacity of at least 25 megawatts. Regionally, these units are responsible for about 95% of carbon dioxide emissions from the electric generation sector. The program limits the amount of carbon dioxide power plants can collectively emit, and requires power plant operators to hold one allowance for each ton of carbon dioxide they emit. The total number of allowances issued cannot exceed the regional

cap, which will decrease over time. Starting January 1, 2009, regional carbon dioxide levels are capped at 188 million tons, slightly higher than current levels, and gradually reduce to 10% below the starting point by 2019.

The system created in the bill allocates the vast majority of allowances in its early years. In contrast, approximately 90% of the allowances under RGGI have been auctioned. Approximately 70% of the proceeds of RGGI auctions have been used for energy efficiency and another 15% have been used for renewable energy programs. In contrast, the bill allows GHG auction proceeds to be used for many other purposes as well.

H. R. 2454 pre-empts subnational cap-and-trade programs such as RGGI from 2012 to 2017 and RGGI would, in effect, be absorbed into the national cap-and-trade program during this period. Under the bill, entities that hold allowances under the subnational programs would be entitled to compensation based on the annual option price of these allowances. Further information about RGGI is available at www. rggi. org/home. OLR report 2008-0338 describes the RGGI auction process.

RES. The bill's RES provisions are similar to Connecticut's current renewable portfolio standard, which requires electric utilities and competitive electric suppliers to meet an increasing part of their demand (currently 9%, rising to 23% in 2020) from renewable resources. In addition, the utilities and suppliers currently must meet 3% of their demand from class III resources, with this proportion rising to 4% starting next year. Class III resources include the savings achieved by conservation programs that began no earlier than January 2006 and the energy produced by certain cogeneration and waste heat recovery systems.

The RES targets, which require utilities to get 20% of their power from renewables and energy efficiency by 2020, are less stringent than those imposed under the renewable portfolio standard. In addition, the bill's definition of eligible renewable resources is generally broader than Connecticut's with regard to such resources as hydropower and biomass. It also includes some sources not included in Connecticut, such as methane produced from coal mines used to generate electricity. On the other hand, it appears that fuel cells that use fossil fuels would not count towards the RES, while they do count towards Connecticut's renewable portfolio standard.

Other Provisions. The bill has other provisions that affect Connecticut's energy policy. For example, it:

1. requires states to adopt stricter energy efficiency provisions in their building codes;

2. preempts state laws setting energy efficiency standards for certain appliances such as walk-in coolers and freezers and certain outdoor lighting fixtures, and

3. requires state utility regulatory commissions to consider implementing standards relating to electric vehicle infrastructure.

Economic

We have found no Connecticut-specific estimates of the bill's costs and benefits. CBO has estimated that, nationally, the bill's GHG cap-and-trade provisions would cost the average household $ 175 a year by 2020, approximately 0. 2% of such households' after-tax income. The costs would be incurred through higher prices for the goods and services that households consume as a result of higher cost carbon-based energy. In CBO's analysis, the impact of the cap and trade program would vary by a household's income, with the poorest 20% of households receiving a $ 40 net benefit in 2020 from the legislation, while the richest 20% would see a net cost of $ 245 a year. The analysis notes that it does not address the economic and other benefits of reducing GHG emissions and the associated slowing of climate change. This CBO analysis is available at www. cbo. gov/ftpdocs/103xx/doc10327/06-19-CapAndTradeCosts. pdf.

CBO has prepared a detailed estimate of the bill's costs at the national level. It estimates that for the 2010-2019 period, enacting the legislation would (1) increase federal revenues by about $ 846 billion and (2) increase direct spending by about $ 821 billion. Taken together, these changes would reduce budget deficits (or increase future surpluses) by about $ 24 billion over the 2010-2019 period. The CBO cost estimate is available at www. cbo. gov/ftpdocs/102xx/doc10262/hr2454. pdf.

Some factors would tend to have Connecticut incurring lower than average costs in meeting the bill's requirements. As noted above, Connecticut already participates in a cap-and-trade program, albeit one with a narrower scope than the one established by H. R. 2454. It appears that there will be little if any added costs for electric utilities in Connecticut to meet the bill's RES provisions beyond those incurred in meeting the state's existing renewable portfolio standard. Moreover, a 2007 Congressional Research Service study found that Connecticut has the lowest carbon intensity of the 50 states, emitting 283 tons of carbon dioxide equivalent per million dollars of gross state product in 2003, compared to a national average of 979 tons. (The study is available at http: //assets. opencrs. com/rpts/RL34272_20071205. pdf. ) Relatively little electricity is generated by coal in Connecticut and the state's economy has a relatively low share of energy-intensive manufacturers. However, the impact of any cap varies by industry.

On the other hand, Connecticut's average household income is among the highest in the country. As a result, Connecticut will tend to receive less in tax credits and rebates, which are targeted to low- and moderate-income households, than poorer parts of the country.

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