The bill establishes an annual tonnage limit on greenhouse gas emissions from specified activities and directs the EPA Administrator to establish allowances equal to the tonnage limit for each year (with one allowance representing the permission to emit one ton of greenhouse gases, measured in tons of carbon dioxide equivalent).

The bill prohibits covered entities from emitting or having attributable greenhouse gases in excess of their allowable emissions level, which is determined by the number of emission allowances and offset credits they hold on the specified date. Monetary and injunctive penalties are associated with non-compliance.

The bill does not restrict who can hold an allowance, nor does it restrict the purchase, sale, or any other transactions involving allowances.

General provisions include:

• Protecting Consumers. Two-thirds of revenues not dedicated to reducing the deficit are rebated back to consumers through energy bill discounts and direct rebates. The bill provides assistance to those Americans who may be disproportionately affected by potential increases in energy prices through tax cuts and an energy refund program.

  After the initial transition period, revenues go into a Universal Refund that will increase until all revenues not spent to reduce the deficit are refunded directly to consumers.

• Regulatory Predictability. States will not be permitted to operate cap-and-trade programs for greenhouse gases. Those states that have already taken a leadership role in implementing emission reduction policies will receive compensation for the revenues lost as a result of the termination of their cap-and-trade programs.

• Price Predictability. A hard price collar binds carbon prices and creates a predictable system for carbon prices to rise at a fixed rate over inflation. Introductory floor and ceiling prices are set at $12 (increasing at 3% over inflation annually) and $25 (increasing at 5% over inflation annually), respectively. A strategic reserve complements the hard price collar and ensures the availability of price-certain allowances in the event of unusually high carbon prices.

• Decreasing Dependence on Foreign Oil. The bill provides more than $7 billion annually to improve transportation infrastructure and efficiency, including highways and mass transit systems. Significant tax incentives encourage the conversion of trucks and heavy-duty fleets to natural gas vehicles.

  The bill invests in developing and manufacturing advanced vehicles, to ensure that America leads the world in advanced cars and batteries, and embraces ongoing efforts to create strong federal standards for greenhouse gas emissions and efficiency improvements in our vehicle fleet.

  Now mindful of the Deepwater Horizon accident in the Gulf, the bill allows coastal states to opt-out of drilling up to 75 miles from their shores. In addition, directly impacted states can veto drilling plans if they stand to suffer significant adverse impacts in the event of an accident. States that do pursue drilling will receive 37.5% of revenues to help protect their coastlines and coastal ecosystems.

• Expanding manufacturing. Industrial sources will not enter the program until 2016. Prior to 2016, allowance value is dedicated to offset electricity and natural gas rate increases for industrial rate-payers and to improve energy efficiency in manufacturing to keep power bills down in the future.

  In 2016, energy-intensive and trade-exposed industries receive allowances to offset both their direct and indirect compliance costs. This assistance will be distributed in a way that rewards efficiency investments and makes our manufacturing facilities more competitive.

  The bill increases incentives for clean technology manufacturing, by expanding the clean energy manufacturing tax credit by $5 billion, providing incentives for the production of advanced vehicles and component parts and funding investments in energy efficiency innovation. Alongside these priorities, we also support community economic adjustment assistance and worker training.

  To protect the environmental goals of the bill, it phases in a WTO-consistent border adjustment mechanism. In the event that no global agreement on climate change is reached, the bill requires imports from countries that have not taken action to limit emissions to pay a comparable amount at the border to avoid carbon leakage and ensure we are able to achieve our environmental objectives.

• Farming. Farmers are exempt from the carbon pollution compliance obligations in the bill. The bill establishes a new multi-billion dollar revenue stream for the agricultural sector through a domestic offset program that provides incentives for farmers to reduce emissions on their land. The program provides USDA with primary authority over domestic agriculture and forestry projects.

  Additionally, the bill supports the Rural Energy for America Program.

• Clean Energy Research, Development and Deployment. The American Power Act funds critical investments in clean energy research and development, including renewable energy technology, advanced vehicle technologies and carbon capture and sequestration. It also establish pilot projects to determine the regional feasibility of light- and heavy-duty plug-in electric vehicles.

• Coal. The bill establishes annual incentives of $2 billion per year for researching and developing effective carbon capture and sequestration methods and devices. It also provides significant incentives for the commercial deployment of 72 GW of carbon capture and sequestration.

• Natural Gas. The bill removes disincentives for natural gas generation at merchant plants. It also helps guide the state regulatory process by requiring public disclosure of chemicals used in the production of natural gas.

• Increasing Nuclear Power Generation. The bill includes a broad package of financial incentives to increase nuclear power generation including regulatory risk insurance for 12 projects, accelerated depreciation for nuclear plants, a new investment tax credit to promote the construction of new generating facilities, $54 billion in loan guarantees and a manufacturing tax credit to spur the domestic production of nuclear parts.

  It also improve the efficiency of the licensing process; invests in the research and development of small, modular reactors (SMR) and enhanced proliferation controls; and designates an existing national laboratory as a nuclear waste reprocessing Center of Excellence.

• Reducing Transportation Emissions. Emissions from the transportation sector will remain under the carbon pollution cap. Producers and importers of refined products will not participate in the carbon market, but will purchase allowances at a fixed price from the allowance auction.

• Blocking Market Manipulation. The bill only requires the largest sources of pollution to comply with reduction targets: those who produce more than 25,000 tons of carbon pollution annually. This means the program only focuses on 7,500 factories and power plants.

  Participation in the auction and primary cash markets is restricted to entities with a compliance obligation and a limited number of market makers. Participation in the secondary market will be open to all participants, but it will only exist on a cash-cleared basis. It will be highly regulated, exchange traded and transparent.

• Fast mitigation strategies. The bill encourages the phase down of hydrofluorocarbons (HFCs) and calls for studies on black carbon emissions as well as an interagency process to promote fast mitigation strategies.

Transportation and refined products. Under previous plans, refiners had to bid or trade for allowances in the market; this would have forced them to add hedge funds to their operations to handle this trading, all at the expense of investing in their core business of being efficient refiners, according to the bill’s authors.

Kerry-Lieberman takes fuel providers out of the market. Instead of every refinery participating in the market for allowances, the bill ensures the price of carbon is constant across the industry; i.e., all fuel providers see the same price of carbon in a given quarter.

The EPA and EIA Administrators will look to historic product sales to estimate how many allowances will be necessary to cover emissions for the quarter, and they set that number of allowances aside at the market price. Then refineries and fuel providers sell fuel, competing as they have always done to offer the best product at the best price. Finally, at the end of the quarter, the refiners and fuel providers purchase the allowances that have been set aside for them. If there are too many or too few allowances set aside, that difference is made up by adjusting the projection for the following quarter. These allowances cannot be banked or traded, and can only be used for compliance purposes.

Specific clean vehicle programs include:

• Electric Vehicle Infrastructure. (Title I, Subtitle E, Part I, Sec. Sec. 1701. The bill mandates the establishment of a national transportation low-emission energy plan that projects the near- and long- term need for and location of electric drive refueling infrastructure and identifies infrastructure and standardization needs of electricity providers, vehicle manufacturers, and electricity purchasers.

• Transportation Efficiency. (Title I, Subtitle E, Part II, Sec. 1711. Greenhouse Gas Emission Reductions through Transportation Efficiency. The bill directs states and metropolitan planning organizations to address transportation-related greenhouse gas emissions by including emission reduction targets and strategies to meet those targets.

  Sec. 1712, Investing in Transportation Greenhouse Gas Emission Reduction Programs, requires the Secretary of Transportation to distribute allowance allocated pursuant to section 781(f)(3) of the Clean Air Act to states and metropolitan planning organizations for approved transportation greenhouse gas emission reduction programs.

• Investing in clean vehicles. (Title IV, Subtitle B, Part II, Subpart B, Section 4111.) The bill establishes a “Clean Vehicle Technology Fund” within Treasury to enable EPA to provide grants to manufacturers and component suppliers to refurbish or expand existing manufacturing facilities to produce advanced technology vehicles and to support engineering integration of certain vehicles and components such as plug-in electric drive vehicles.

• Natural Gas. (Title IV, Subtitle B, Part II, Subpart B, Section 4121.) Extends and doubles for 10 years the alternative fuel credits for purchase of natural gas vehicles that have a weight greater than 8,500 pounds and are only capable of operating on compressed or liquefied natural gas or capable of operating for more than 175 miles on one fueling of compressed or liquefied natural gas and is capable of operating on gasoline or diesel fuel. Also, extends and doubles the credit for vehicles of weight less than 8,500 pounds for commercial fleet vehicles of at least ten cars and purchases of at least three natural gas vehicles. Modifies the definition of mixed fuel vehicle to include a vehicle which is capable of operating on compressed or liquefied natural gas and operates at 65% compressed or liquefied natural gas and not more than 35% petroleum-based fuel.

  Section 4122 allows state and local governmental entities to issue tax credit bonds in order to finance natural gas vehicle projects. Provides a national limitation amount of $3 billion.

  Section 4123 allows 100% of the cost of a natural gas vehicle manufacturing facility that is placed in service before 1 January 2015 to be expensed and to be treated as a deduction in the taxable year in which the facility was placed in service. Allows 50% of the cost to be expensed for a facility placed in service after 31 December 2014 and before 1 January 2020.

  Section 4124 directs the Administrator of General Services, in consultation with the Administrator and Secretary, to conduct a study for how the Federal fleet could increase the number of light-, medium-, and heavy-duty natural gas and liquefied petroleum gas vehicles in the fleet and report this study to Congress no later than 180 days after the date of enactment of this Act.

Resources

• The American Power Act

• Section by section summary of the bill

• 2010 US Greenhouse Gas Inventory Report