Reductions in Greenhouse Gas Emissions under the House's Climate and Energy Bill

July 4, 2009

The American Clean Energy and Security Act (H.R. 2454), recently passed by the House of Representatives, would establish two cap-and-trade programs for greenhouse gas (GHG) emissions. One small program would apply only to hydrofluorocarbons (HFCs) while a much larger program would apply to other types of GHG emissionspractically all emissions from the combustion of fossil fuels plus a fraction of other emissions from industrial and agricultural sources. Under the bill, operators of most sources of emissions would be required to hold an allowance for each ton of GHG they emit, and other entities would be required to hold an allowance for each ton of GHG that will be emitted when the fuel they sell (such as gasoline) is burned or when a product they produce (such as HFCs) escapes into the atmosphere.

By gradually reducing the total number of allowances available every year, the bill would lower the total amount of emissions from the sources it covers. However, the bill would allow those sources to produce emissions in excess of their allowances if they pay for reductions in emissions elsewhere. For example, if an electric utility paid a landowner to reforest a parcel of farmland so that the trees would absorb carbon dioxide, it would receive offset credits that it could submit in lieu of allowances, allowing it to produce a larger quantity of emissions than it would have otherwise. The bill would allow covered entities to purchase such offsets from domestic sources and, under certain circumstances, from sources outside of the United States. In CBOs estimation (CBOs original cost estimate), covered sources would use significant amounts of offsets and thereby reduce their own emissions substantially less than they would if offsets were not availablewhich, in turn, would cause the price of allowances to be much lower than otherwise.

The bill also would allow entities to bank unused allowances if they chose, carrying them over from year to year until they decided to use them. CBO projects that entities would undertake more emission reductions than necessary in the early years of the program, banking several hundred million tons worth of allowances per year to use in later years when emission allowances would become increasingly scarce and hence more valuable.

The figure below shows CBOs estimate of how U.S. emissions (or output of products that will ultimately result in emissions) would be reduced under the House-passed bill. This estimate incorporates the number of allowances that would be issued under both the GHG and HFC caps, as well as the opportunities to purchase domestic and international offsets and incentives to bank allowances.

Estimated U.S. Emissions under the House-passed Bill

For example, in the absence of any change in policy, CBO projects that in 2020 total U.S. emissions will be about 7,580 million metric tons of carbon dioxide equivalents; emissions by entities that would be covered under the two cap-and-trade programs would account for about 6,550 million tons, more than 85 percent of total U.S. emissions. Under the legislation, covered entities would have access to about 5,200 allowances (the nominal cap in that year less a set-aside of allowances that would become available only if allowance prices in the large program spiked unexpectedly high). By CBOs estimates, these entities would pay for about 300 million tons of reductions by domestic entities not covered by the cap-and-trade programs, and they would purchase nearly 430 million tons of reductions in foreign countries, for which they would receive credit against 350 million tons worth of domestic emissions. The allowances and offsets together would allow covered entities to emit roughly 5,850 million tons of carbon dioxide equivalents (5,200+300+350), but CBO estimates that the entities would choose to bank allowances for 20 million tons (having already accumulated over 2,000 million tons of banked allowances by 2020). Thus, total emissions of the covered entities in that year would be about 5,830 million tons, 720 million tons (or 11 percent) below the amount anticipated under current law. (That percentage would increase to about 53 percent by 2050.)

If the offsets represented true emission reductions relative to baseline, then total emission reductions spurred by the bill would be 1,450 million tons (6,550-5,830+300+430). However, many observers worry that at least some of the offsets might be difficult to verify or might themselves be "offset" by increases in emissions elsewhere.