The American Power Act: MARKET REVIEW
The American Power Act represents a key landmark for global carbon markets and the international corporate community. RepuTex’s Market Review breaks down key elements of the Bill, notably the inclusion of a ‘carbon tariff’ on imports with high carbon intensity, a component likely to impact supply focused companies globally, notably in China and Australia. A summary is provided by RepuTex below.
The Kerry- Lieberman Climate Bill (American Power Act) was released on 12th May 2010. The Bill applies different regulations to different sectors, with utilities directly exposed to a carbon price from the inception of the scheme in 2013.
Over 7,500 facilities are expected to be integrated under the scheme, manufacturing will be included under a cap from 2016. The overall target for the scheme remains at 17% emissions reduction by 2020. The Bill allows for the use of up to 2 billion credits of domestic and international offsets, including CERs (certified emission reduction). Refer to the summary below:
• Cost containment measures including a price cap of $25 and a floor price of $12;
• Free allocation of large portion of permits (i.e. 75%);
• Full auctioning of credits for utilities from 2030;
• Carbon tariff on imports;
• Compensation for energy price hikes for manufacturers and consumers; and
• 20% discount rate for CDM based offsets from 2018.
The inclusion of a carbon tariff on imports puts immense pressure on Asian exporters, notably Chinese companies, which will need to assess the carbon intensity of their products and subsequent carbon tariff costs. Given the carbon price containment measures which include a carbon cap and floor as well as a strategic reserve of allowances, RepuTex anticipates limited price volatility in the early years of the scheme. Table 1 summarises the important aspects of the American Power Act.
Table 1: Summary of the American Power Act
| Target | Midterm: 17% by 2020 (below 2005 levels) Long term: 80% by 2050 (below 2005 levels) |
| Mechanism | Cap and trade |
| Sectors | Utilities ( coal plant performance standards to be established) Manufacturing/Industries Oil Refining (separate cap, ‘Pollution permits’) Excludes Agriculture/Farming |
| Eligibility | Facilities emitting > 25,000 tons CO2-e (22,679 tonnes) |
| Participants | Approximately 7,500 facilities |
| Timeline | Utilities: covered under cap from 2013 Manufacturing: covered under cap from 2016 |
| Price Control Mechanism | Price cap: $25 (increase by 5% + CPI) Price floor: $12 (increases by 3% + CPI) |
| Permit Allocation | It is expected that approximately 75% of allowances will be allocated for free until 2028. Details regarding the exact distribution of permits are yet to be announced. Manufacturing: free permits until 2026 coinciding with the end of ‘Transitional’ phase. EITE (emission intensive trade exposed) approach for direct & indirect compensation. Oil refining: free permits till 2026 Utilities have to buy all their permit needs from 2030 (other sectors from 2035). |
| Compensation | Manufacturers will receive enough permits in 2013-16 to cover increases in energy costs. |
| Reserve (allowances) | Strategic reserve of 4 billion tons of credits Can be released into market to stabilise carbon price |
| Offsets | Domestic offsets: 1.5 billion tCO2-e. This includes agriculture based, coal gas capture, landfill gas, biomass emissions reduction projects. International offsets: 0.5 billion tCO2-e . Offsets from CDM (clean development mechanism) projects have been included as well as credits from sector based mechanisms. However a discount rate of 20% applies from 2018. Excludes offset credits from REDD (reduced emissions from deforestation and forest degradation) |
| State & Regional Schemes | This Bill pre-empts all regional and State based schemes (RGGI, WCI, and California B32). |
| Clean Energy Measures | The Bill allows $70 billion for clean/natural gas transportation over ten years. Nuclear energy expansion has also been flagged. |
| Carbon Tariff | Places carbon tariff on imports |
| Consumer Protection | The Bill includes provisions to compensate low to moderate income households through ‘monthly refunds’ for increases in energy costs. |
