Last week, a Senate climate bill companion to one passed by the US House in 2009 finally emerged, the so-called “American Power Act,” sponsored by Senators John Kerry and Joe Lieberman, both Democrats. Republican Senator Lindsey Graham was also heavily involved in drafting the bill, but dropped out of support over the past few weeks among a variety of disputes with the Democrats over the climate bill and other issues.
As we have said repeatedly at TheGreenSupplyChain.com, whether some form of carbon emissions eventually passes or not is one of the central supply chain issues of our time. Without passage, efforts to improve the Sustainability of the supply chain is a matter almost totally within the control of an individual company, which can make those decisions based on its own strategies and preferences with regard to potential savings, public relations value, consumer preference, and more (add to that recent mandates and reporting from a companies business customers – see Procter & Gamble Latest to Jump on Supplier Sustainability Scorecard Mandate with ''Open'' Approach.)
So now we have the 997-page Senate bill, which most believe is closer to legislation that might actually get through both houses of Congress and be signed into law than the House bill of last year.
Senate bill backers says it will “remake the face” or American energy production and use, along the way reducing greenhouse gas emissions by 17% by 2020 and 83% by 2050 (both off of 2005 levels, a later baseline date than many wanted). The bill also claims it will reduce dependence on oil from OPEC countries by some 40% by 2030.
So what is actually in the Senate bill, how will it achieve these goals, and what is the impact on supply chains? It is amazingly hard to find those answers, we discovered, but below we provide our analysis, based on researching many sources regarding the proposed legislation.
Cap and Trade Program is at Core of the Bill
The bill would create a complex cap and trade program where first utilities and then manufacturers would receive “allowances” that are in effect permits to emit a certain amount of CO2 today, based on based on current emissions and other factors.
The program would start for utilities in 2013, and manufacturers in 2016. 25% of the initial permits would be auctioned off, and 75% distributed at no cost to utilities and manufacturers. However, language in the bill is often not clear on this process, and in parts has what appears to be conflicting approaches in different sections of the bill.
By 2035, however, there is no debate that the Kerry-Lieberman bill shifts to a full 100 percent auction of emission allowances, with the revenue directed completely back to consumers to offset rising costs of energy and products.
The bill would set maximum and minimum prices for permits that each represent one metric ton of carbon dioxide. The floor would be $12 per allowance and the ceiling would be $25 in 2013. The floor and ceiling prices would rise over time.
Oil refineries in the U.S. wouldn’t be required to buy pollution allowances in the carbon market. Instead, they would “purchase allowances at a fixed price” from the government.
 Over time, the number of allowances would be phased out. Companies that need more allowances than they own will need to buy them through an exchange mechanism that is likely to be quite complex; similarly, companies with extra allowances will sell them through the exchange and thus reap new profits. This is why some utilities are strongly behind the cap and trade concept, because they believe they have an advantage over others in their current level of emissions and may be able to find new profits in the millions by selling their excess allowances.
While the floor and ceilings provide some range of potential impact on supply chain costs, the reality is those costs can vary widely, and no one is very sure how the allowances trading will play out. Clearly though, as the number of allowances is phased downward, the cost of purchasing allowances will rise, perhaps dramatically.
Impact on Energy Prices
There are wild and wide estimates on the impact of the bill on electricity and fuel prices.
One estimate – no surprise from a left-leaning think tank – said the impact would be as little as 20-25 cents per gallon on consumer gasoline over the next decade. Others, especially from more right leaning groups, say the impact is more likely to be at least $1.25- $1.50. One can expect the impact on diesel to be at least as high proportionately.
The reality is no one really knows, because there aren’t enough details even in a 997-page bill, and no one can predict how the allowances trading markets will really work in practice.
Impact on Global Sourcing
The bill does contain provisions for eventual implementation of carbon tariffs on goods coming from countries not deemed to have done enough to reduce their greenhouse gas emissions. As we have noted before, the idea of carbon tariffs is one fraught with complexity – as just one east example, a country-based approach could put a large tariff on goods from a low emitter company because it is in a country that is considered a high emitter. (See The Crazy World of Carbon Tariffs.)
Regardless, it means companies need to start looking immediately at how this could impact total landed costs for different sourcing regions. It is possible under the bill that even a US company with a strong environmental effort could get hit with a tariff bringing goods in from its own plant or suppliers from a specific country.
Sherrod Brown, a liberal Senator from Ohio, wants changes made to the bill to remove the ability of the president to make adjustments to these carbon tariffs, afraid the global politics will lead to too many side deals that gut the effect of these new duties.
Impact on Manufacturers
The bill calls out something is terms “Energy-intensive trade exposed industries,” which we take to mean manufacturers that currently require a lot of energy use and which also could be put at competitive disadvantage versus global rivals due to higher operational costs as a result of this bill.
Such companies will get 2 percent of their allowances for free from 2013 to 2015, though they do not face their first emission limits until 2016. Kerry and Lieberman said the credits should help the industries transition to the carbon market. From 2016 through 2025, the industries get 15 percent of the allowances for free, dropping to 12 percent in 2026, 9 percent in 2027, 6 percent in 2028 and 3 percent in 2029.
However, "It's not clear the allocation math adds up," sayd Scott Segal, an attorney at Bracewell & Giuliani and who represents the refining and electric utility industries. "It's not at all clear there are enough allocations for enough time to make a difference in shielding energy intensive industries from market distortion and international competition problems," Segal added.
Energy Development
Despite the recent BP deep sea rig disaster, the bill does include some incentives for offshore oil development, language that clearly was developed before this latest incident off the Louisiana coast. It also provides some potential incentives for nuclear power development, and the bill promises to promises to expedite licensing for nuclear reactors "in a way that is guided by sound science and engineering while remaining fully mindful of safety and environmental concerns."
Many view those qualifications as meaning the path will remain very difficult for bringing new nuke plants on-line.
Energy trader T. Boone Pickens should also be happy, as the Senate bill incorporates a number of incentives he has favored in support of natural gas powered trucks and development of wind energy.
States can Trump National Regulations and Policies
Business interests were hoping that the bill would preempt the possibility of individual states enacting their own environmental rules that may be even more onerous than the national policies and potentially require businesses to meet different requirements simultaneously. That state effort is being led by California, which has its own very aggressive global warming statute.
The Senate bill does not really restrict state efforts, however.
"We will not undermine California," Sen. Kerry said last week.
Summing it Up
Details are vague, and few have been through the entire bill in detail. One thing that is almost certain is that many changes will be made before the bill starts to work its way through committee as issues and raised and deals are made.
“The legislation still lacks key details on how these programs will work and what impact they will have on the economy,” the National Association of Manufacturers said last week. “We will actively work with the Senators to make certain the concerns of manufacturers are addressed and that final legislation does not compromise our ability to compete in the global marketplace.”
"This bill is a compilation of just about every bad idea that has emerged in the energy debate," said Patrick Creighton, spokesman for the Institute for Energy Research, a free-market think tank. "Two things are certain if this bill becomes law: Energy prices will skyrocket, and jobs will be shipped overseas."
However, T. Boone Pickens says that “Achieving energy security is not easy and I applaud their focus on a broad energy package,” among many other supporters of the bill.
What is clear is that if the bill passes in any form it will have an immediate and profound impact on manufacturers and their supply chains – look to TheGreenSupplyChain.com for more news and analysis.
What is your reaction to the new Senate climate bill? How significant do you believe the bill will be for supply chain practice if it passes in anything like its current form? Is it possible for business to really understand the impact now? Let us know your thoughts at the Feedback button bellow.
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