Thursday, July 2, 2009

US participants eye Senate for climate bill reform

Isramart 01 July, 2009

Carbon market participants have vowed to lobby the US Senate for modification of the regulatory provisions for a federal cap-and-trade program featured in a US House of Representatives bill that was adopted last week.

Following a close 219-212 victory in the House on Friday, the American Clean Energy and Security Act faces an uncertain future in the Senate. While supporters of the bill say the House action provides momentum, they acknowledge it will be difficult to secure the 60 votes needed to overcome the threat of a filibuster – a procedural effort to block a vote – despite the Democrats now holding 60 seats in the Senate, following a decision on Monday by Minnesota’s Supreme Court to hand the state’s disputed seat to Al Franken.

“I think there will be some very significant modifications, led by the Gang of 16,” said Aimee Barnes, head of US regulatory affairs at project developer EcoSecurities, referring to a group of Senators from the Midwest states representing critical swing votes.

Senator Barbara Boxer, chairwoman of the Senate’s environment and public works committee, hopes to debate and amend any proposed legislation before the August recess and Senate Majority Leader Harry Reid wants committees to finish work on the bill prior to 18 September. If the Senate passes its version, members of both legislative bodies will form a conference committee to create a joint bill.

One of the concerns with the House bill is the requirement for over-the-counter trades of carbon derivatives to be cleared and settled on exchanges, in response to Congressional concerns about creating a proper regulatory system and despite intense lobbying.

But the requirement has significant market implications. For example, the bill does not clarify if offset development contracts would be classed as derivatives – if so, they could be required to go through the exchange process. This could be problematic because many deals are long-term arrangements or involve a party that is not a member of an exchange.

“We just want to make sure it’s a workable system,” said Dirk Forrister, managing director of New York-based environmental asset manager Natsource and head of the market oversight committee for the International Emissions Trading Association (IETA). “That’s something we’ll be discussing with senators.”

One positive element is the bill’s clarification that the Commodity Futures Trading Commission will have the primary role for regulating carbon derivatives while the Federal Energy Regulatory Commission will regulate the spot market.

But states would be allowed to implement regulations beyond federal mandates so companies could conceivably be forced to navigate multiple regulatory regimes, Forrister said.

Another problematic provision directs the Environmental Protection Agency (EPA) to develop new source performance standards for methane projects, after aides to the bill’s sponsors Henry Waxman and Ed Markey insisted those provisions remain despite arguments that such projects were necessary to expand the offset pool.

“I think that concept is probably here to stay,” said Barnes of EcoSecurities.

Market participants were relatively unconcerned about an agreement reached by Congressional Democrats last week to give the US Department of Agriculture (USDA) authority over domestic agricultural and forestry offsets rather than the EPA. As long as the process is streamlined so developers do not have to learn two different systems, which adds unnecessary cost and burdens, there is no difference here, Barnes said.

But having two agencies in charge of regulating offsets could result in different standards for the same types of projects, said Alexia Kelly, senior associate in the climate and energy program of the World Resources Institute in Washington, DC. For example, the EPA would have jurisdiction over international afforestation projects while the USDA would regulate domestic afforestation. “You could end up with vastly different outcomes,” she said.

A late deal was reached to allow offset credits issued under state or voluntary programm such as the Chicago Climate Exchange established before 1 January, 2009, to exchange credits for emissions allowances, as long as they meet certain quality criteria outlined in the bill.

“We think this is the environmentally optimal way to recognise these early actions,” Kelly said.