Environmental Business Alert: H.R. 2454, The American Clean Energy Security Act: Potential Impact On Retailers

Date: May 27, 2009

The long talked about clean energy and climate change legislation from the House Energy and Commerce was introduced on Friday, May 15.[1] If the bill passes, it would establish standards for greenhouse gas ("GHG") emission reductions, while also providing incentives for advancements in clean energy and energy efficiency technologies.

Although H.R. 2454 would have the greatest impact on energy-intensive sectors like fuel and cement production, and chemical and petrochemical processing, all sectors of the economy could be affected by passage of the legislation. Consider, for example, the impact of H.R. 2454's climate registry requirement on U.S. retailers.

Climate Registry and Emissions Reporting

As proposed, H.R. 2454, § 713 would require any entity that has fossil fuel-fired combustion devices that emitted or produced in 2008 or any subsequent year more than 10,000 tons of carbon dioxide ("CO2") equivalent (hereinafter "tCO2e") to report such emissions to a federal GHG registry. The 10,000 tCO2e threshold would cover facilities that consume roughly 183 million cubic feet ("MMcf") of natural gas per year (e.g., facilities operating fuel burning sources with aggregate capacity of 21.5 million British Thermal Units per hour ("MMBtu/hr") for 8,760 hours per year).

The bill defines "The Climate Registry," which was jointly established and managed by several North American states, provinces, territories and Native Sovereign Nations, as the U.S. federal GHG registry. The Climate Registry, however, supports both voluntary and mandatory GHG reporting programs and so its role as the federal GHG Registry seems less than clear. Reliance on the Climate Registry also seems redundant as H.R. 2454 also would require annual reporting to the U.S. Environmental Protection Agency (EPA) of GHG emissions and the production, manufacture, and use of fuels and industrial gases that result or could result in GHG emissions.

Interestingly, the U.S. EPA considered and rejected H.R. 2454's 10,000 tCO2e threshold for its own GHG reporting proposal.[2] In evaluating the need for facilities relying on fossil fuel-fired combustion devices to report on GHG emissions, EPA specifically rejected the 10,000 metric tons of CO2e (hereinafter "mtCO2et") threshold for two reasons: 1) the adverse impact on small businesses, and 2) the negligible benefits. The Agency determined that in comparison to the 25,000 mtCO2e[3] threshold it ultimately proposed, a 10,000 mtCO2e threshold would provide only a negligible increase in the GHG emissions coverage—accounting for less than 1% of total additional GHG emissions.[4]

The EPA also proposed a significant qualifier. Any stationary fuel combustion unit included in the annual GHG emission calculations must have an aggregate maximum rated heat input capacity of more than 30 mmBtu/hr. According to EPA, over seventy-five percent of commercial buildings have stationary combustion equipment with maximum rated heat input capacity of less than 1 mmBtu/hr. Moreover, EPA noted that approximately 80% of commercial buildings with boilers for heating water or steam use boilers with a maximum rated heat input capacity of less than 10 mmBtu/hr. Based on these criteria, it is unlikely that most business buildings, including retail stores, would be covered by EPA's proposed rule on GHG reporting. EPA established these thresholds in order to limit the burden on small emitters since EPA calculated that under its proposed capacity and emission thresholds, 85 - 90 percent of total GHG emissions from facilities would be captured. It is disappointing that in developing H.R. 2454, Congress failed to consider EPA's analysis of small business impacts.

Congress is also proposing to cover under The Climate Registry any vehicle fleet with annual emissions of more than 25,000 tCO2e if the Administrator determines that coverage of such fleets will help achieve the GHG reduction goals established under the bill. Thus, large retailers that own and operate transportation fleets for product delivery could be required to file annual reports of their carbon dioxide emissions and their gasoline or diesel consumption.

Proposed Allowance System

In addition to the reporting obligations discussed above, H.R. 2454, §§ 721 and 722 propose an allowance allocation program. One allowance would allow the allowance holder to emit one tCO2e of GHG. The emission allowance structure has yet to be defined; however, indications are that allowances could be allocated through government-run auctions based on the highest price offered.

Covered entities would be required to hold emission allowances equal to the amount of GHG emissions for which they are responsible. Beginning in 2014, a retail facility that has a fossil fuel-fired combustion device, such as a boiler, or grouping of such devices that emitted 25,000 or more tCO2e in 2008 or any subsequent year would be subject to emission restrictions and the allowance system.

These sections of the bill should receive a great deal of scrutiny as there are still many unanswered questions. For instance, why establish a 10,000 tCO2e threshold if the allowance threshold is 25,000 tCO2e? Although the bill discusses the initial distribution of allowances to some industry sectors, others are not addressed. Other key questions that come to mind include how will allowances be auctioned? Who is the property holder of the allowance — the government or the entity? How will trades be managed? And, how will the value of each emission allowance be established? Will small businesses be protected? Will essential businesses or services be affected adversely by an auction system? Auction schemes were considered and rejected in the past as environmental regulatory vehicles. For example, auctions as a regulatory method to control ozone-depleting chemicals was rejected based on adverse impacts to small businesses in the 1980's.

please contact Sheila A. Millar (202.434.4143; millar@khlaw.com), Trent Doyle (202.434.4161; doyle@khlaw.com), or Jean-Cyril (JC) Walker at (202.434.4181; walker@khlaw.com).

[1] As of May 22, 2009, the bill was still under Committee review.

[2] Mandatory Reporting of Greenhouse Gases, 74 Fed. Reg. 16,448 (April 10, 2009). Specifically, the EPA considered a threshold of 10,000 metric tons of CO2. equivalent, which is equivalent to approximately 11,000 US (short) tons of CO2 equivalent.

[3] 25,000 mtCO2e is equivalent to approximately 27,557 U.S. (short) tons.

[4] See Frequently Asked Questions: Proposed Mandatory Greenhouse Gas Reporting Rule, at http://www.epa.gov/climatechange/emissions/ghg_faq.html#proposedthreshold.

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