A TALE OF TWO COUNTRIES

For more than a decade the United States and Australia have been two of the most conspicuous holdouts against signing the 1997 Kyoto Protocol on greenhouse gas reduction. The conservative administrations that led both countries during much of this period initially professed skepticism about global warming claims, and expressed distress regarding China’s and India’s lack of emissions caps. In addition, both countries depend upon coal for much of their energy needs and thus have significant economic concerns over the cost of capping carbon emissions.

In 2009 new and more liberal U.S. and Australian governments launched ambitious efforts to secure passage of legislation to limit GHG emissions while encouraging the use of renewable energy sources. The efforts of the U.S. Congress have increasingly become bogged down as conflicting legislative proposals have emerged, and the dominant issue of health care reform has overshadowed climate concerns.

In Australia the government initiative has advanced somewhat further, but still has become mired in controversy. The Australian experience, although less publicized, presents a cautionary example of how difficult a road GHG regulation and alternative energy incentives face in the United States.

AUSTRALIA: HALF A LOAF
The initial Australian climate change proposal aimed to reduce the country’s greenhouse gas emissions to between 5 and 25 percent below 2000 levels over the next 10 years, conditioned on international agreement at a planned December 2009 climate summit in Copenhagen to achieve equally aggressive reduction goals.
Although this proposal was supported by Australia’s governing center-left Labor party, the conservative Liberal/National party coalition opposed the bill as economically unwise and environmentally ineffective. The liberal Green party agreed with the later position and declined to support the Labor proposal, which ultimately failed in the Australian Senate.

NEW RENEWABLE TARGET
Australia’s climate change legislation included a new national mandatory renewable energy target. In an August 2009 compromise, the Labor government proposed, and the Senate agreed, to proceed immediately with the renewable energy portion of the climate change bill while considering amendments to the portion of the proposal that would involve trading of emissions credits under a cap-and-trade system. The compromise also involved pledges of assistance to energy intensive industries like aluminum producers and coal mines, with the Labor government planning to reintroduce a revised version of the cap-and-trade portion of the bill before year’s end.
During the subsequent two months, the Labor government called on the opposition Liberal Party to submit its suggested changes to the proposed carbon trading scheme to be considered for inclusion in amended legislation, once Parliament returned from its recess in October. Australian press reports indicated that the Liberal Party leadership was reserving its right to filibuster the Government's emissions trading scheme legislation in November and to delay a vote until after Christmas.

Any such tactic would need the support of independents in the Australian Senate, and several have stated that they support the idea of delay until at least early 2010, after the Copenhagen summit. By late October the Labor government reintroduced carbon trading legislation into the House of Representatives as it continued talks with the opposition on proposed changes, including increased compensation in the form of additional emissions permits for coal-fired power stations. Under the new proposal, a cap-andtrade system would begin in 2011. The legislation will not be considered by the Senate until mid-November with the last opportunity for a vote on the bill in 2009 being November 26.

AUSTRALIA'S TOP 100
It is interesting to note that a report sponsored by a leading Australian investment bank and released in early October showed that most of Australia’s top 100 listed companies lack investment plans to cope with the country’s proposed emissions reduction laws. Of the companies surveyed, 76 percent said they had yet to decide on such measures, and more than one-third of the 100 largest companies had not set clear targets to reduce their carbon emissions. Such indecision may not be possible in the U.S., no matter what the fate of climate change legislation. The U.S. Environmental Protection Agency has already proposed regulations to require reporting of greenhouse gas emissions from certain sectors of the economy. Approximately 10,000 facilities, accounting for approximately 85 percent of GHG emitted in the United States, would be covered under the proposal. Their first annual report would be due to the EPA in 2011 for calendar year 2010 emissions, except for certain vehicle and engine manufacturers, which would begin reporting for model year 2011.

UNITED STATES: CONFLICTING PLANS
Despite the EPA’s bold reporting plan, on a national level, US GHG reduction/ renewable energy expansion efforts are increasingly bogged down in conflicting legislative priorities. On June 26, 2009, the US House of Representatives passed the American Clean Energy and Security Act (ACES), also known as the Waxman- Markey Bill, sending it to the US Senate for action. ACES would create a comprehensive, economy-wide cap-and-trade program to reduce GHG emissions, authorize significant new programs to encourage renewable energy production and use, and create a new federal renewable electricity credit (REC) trading system. It places an overall cap on GHG emissions, and covered entities must obtain an allowance or offset for each metric ton of carbon dioxide equivalent emitted. Allowances, offsets and their derivatives would be traded on the new GHG markets.

ACES DRAFTED
Under ACES as currently drafted, GHG emissions are capped starting in 2012 at 97 percent of 2005 levels for 2012. The cap is gradually reduced to 83 percent of 2005 levels for 2020, 58 percent of 2005 levels at 2030, and finally 17 percent of 2005 levels at 2050.
Each year, covered entities must submit an allowance or an offset for each metric ton of carbon dioxide equivalent emitted, with penalties for failing to do so.
ACES also requires retail electricity suppliers to meet increasingly higher percentages of their load with electricity from renewable energy sources. Beginning in 2012, 6 percent of electricity is to come from renewable sources and efficiency, gradually rising to 20 percent by 2020.
On September 30, 2009, Senators John Kerry (D-MA) and Barbara Boxer (D-CA) announced the introduction of the Clean Energy, Jobs and American Power Act, which in many respects mirrors the provisions of ACES. Notably, in its current form, the Senate bill expressly preserves the EPA’s authority to regulate GHG emissions under the Clean Air Act, as it has proposed in a recent rulemaking.
The Senate bill also lacks a federal renewable energy standard, although a parallel piece of legislation sponsored by Senator Jeff Bingaman (D-NM).
One other important issue not addressed by the Kerry-Boxer bill is the form that regulatory oversight of newly created carbon allowance and offset markets would take. In contrast to provisions of the House bill relating to the roles of FERC and the CFTC in regulating carbon and carbon futures markets, the Kerry-Boxer bill includes in a section covering carbon market oversight only the “sense of the Senate” that there shall be a “single, integrated carbon market oversight program” designed, among other things, to “ensure a well-functioning, well-regulated market, including a futures market, designed to manage risk and facilitate investment in emissions reductions. . . .” It is unclear whether the Senate version ultimately will borrow broadly from the House version with respect to shared oversight between FERC and the CFTC or will grant jurisdiction over carbon cash and derivatives products trading to one agency.

MORE REGULATORY CONTRADICTIONS
Two other legislative initiatives add still more regulatory contradictions: In early July, Senators Diane Feinstein (D., Cal.) and Olympia Snowe (R., Maine) introduced legislation to establish federal oversight for GHG allowances markets. Their bill (S. 1399) would require most trading in GHG permits and their derivatives to take place on regulated exchanges or through a “carbon clearing organization” to be established by the CFTC.
A small number of derivatives contracts that can’t be standardized for exchange-based trading could be bought and sold in private over-the-counter deals, as long as they are reported to the CFTC. This is in contrast to the provisions of ACES, which divides the oversight authority between the FERC for cash-based allowances trading, and (seemingly) the CFTC for carbon futures and derivatives trading. The Feinstein-Snowe bill also classes standardized bilateral swaps as regulated derivatives, creates professional standards for carbon traders and brokers, and establishes a centralized electronic database to track trades – all provisions that are not contained in ACES. The Obama Administration has stated that derivatives trading regulatory reform is an Administration priority. On August 11, 2009, the U.S. Department of the Treasury delivered legislative language to Capitol Hill that would significantly restructure the regulatory framework that governs the market for over-the counter derivatives. The proposed legislation would require central clearing and trading of all standardized OTC derivatives, institute higher capital requirements and higher margin requirements for non-standardized derivatives, extend regulatory oversight, and further restrict the definition of eligible investors able to engage in certain exempt OTC derivative transactions. Both the House Financial Services and Agriculture Committees have revised the Treasury proposal and have presented multiple Congressional Over-the-Counter- Derivatives Market Act of 2009 proposals, with the latest being passed unanimously on October 21, 2009 by the House Agriculture Committee, which renamed the draft the Derivative Markets Transparency and Accountability Act of 2009. These proposed provisions do not specifically address the cap-and-trade markets, but will have substantial impact on them.

UNMET RESPONSIBILITIES?
Some observers believe that if ACES follows a path in the U.S. Senate similar to Australia’s climate change proposal, the near-term result could be a new national renewable energy standard with no federal carbon cap-and-trade system. There is considerable sentiment in Congress, generated by the 2008 financial meltdown, that the trading of emission allowances and their derivatives will produce fraud, excessive speculation and market manipulation. In this context, it is uncertain whether the legislation aimed at reforming the derivatives markets will at add fuel to a federal renewable energy standard or broader climate change program, or only complicate matters further. If both the U.S. and Australia wind up with legislation that encourages renewable energy yet fail to restrict GHG emissions, it is unlikely that either country will be viewed as meeting its responsibilities to address global warming by the 190-plus Kyoto Protocol signatory countries when they meet in Copenhagen.