News Release

ACC Comments on House Energy and Environment Subcommittee Hearing on Allowance Allocation Policies

Support for Intent of Inslee-Doyle Proposal; Some Changes Needed to Help Fulfill Policy’s Objectives

ARLINGTON, VA (June 9, 2009) – This morning the U.S. House Energy and Commerce Subcommittee on Energy and Environment is holding a hearing entitled “Allowance Allocation Policies in Climate Legislation: Assisting Consumers, Investing in a Clean Energy Future, and Adapting to Climate Change.” The hearing examines allocation policies under the American Clean Energy and Security Act (ACES) (H.R. 2454). The Dow Chemical Company is among the witnesses.  Additional information is available at http://energycommerce.house.gov/. The American Chemistry Council submitted written testimony for the hearing, and this testimony may be viewed at http://www.americanchemistry.com/9727

American Chemistry Council (ACC) President and CEO Cal Dooley issued the following statement:

“We commend the Subcommittee for holding a hearing on allowance allocation policies in climate legislation. ACC supports policies to reduce greenhouse gas (GHG) emissions across the economy. Indeed, American chemistry is a climate solutions provider: our products and processes go into a wide variety of energy efficiency and renewable energy applications, from building insulation and solar panels to wind turbines and compact fluorescent light bulbs. In our own operations, GHG emissions fell 16 percent between 1990 and 2008 – a reduction that would have exceeded the Kyoto Protocol target.

We appreciate that the Committee recognized the unique position and role of energy-intensive industries by including the Inslee-Doyle energy and trade intensive rebate proposal in H.R. 2454. Although ACC supports the intent of the program in Section 764 (Eligible Industrial Sectors), we are concerned that some of the key issues related to the competitiveness of energy-intensive manufacturers and the potential for carbon leakage have not yet been adequately addressed by the allowance allocation system.  Important technical corrections are needed. 

Unfortunately, unilateral climate change policy has the potential to drive manufacturing production, jobs, and greenhouse gas emission to overseas markets, also known as ‘leakage.’ Cap-and-trade policy would require domestic industries to face higher costs due to both compliance with the program and higher fuel and energy costs passed along from other regulated entities. Leakage of emissions can also occur as demand for domestically produced products decreases as prices increase. Fuel inputs in other parts of the unregulated world would become comparatively less expensive, making it difficult for domestic companies to produce similar products at the same price. In addition, manufacturing industries in these other countries have not achieved improvement in their energy efficiency. An increase in demand for manufactured products from these countries would result in a net increase in greenhouse gas emissions.

The current Inslee-Doyle rebate program in H.R. 2454 would compensate qualifying facilities with rebates based on their purchased electricity and direct greenhouse gas emissions. ACC appreciates the efforts made by the bill’s authors to address concerns that climate policy would put energy-intensive manufacturers at a competitive disadvantage.  The allowances given to energy-intensive manufacturers must be sufficient to prevent leakage. In order to strike the correct balance between awarding enough allowances to prevent leakage, while also achieving the bill’s emissions reduction goals, we make the following recommendations:

Fixed Percentage of Allowances – The number of allowances dedicated to the energy and trade intensive manufacturers rebate program must be a fixed percentage of the annual allowances available under the cap. The bill treats energy-intensive industries differently from all other allowance recipients (e.g. utilities, oil and gas distribution companies), with energy intensives receiving reduced allowances after 2014. Energy intensive manufacturers should receive a sufficient and stable pool of allowances. The bill should be modified to award the energy and trade intensive manufacturer’s rebate program a fixed 15% of the annual allowances through 2025.

Carbon Factor Methodology - The methodology for calculating a facility’s direct and indirect carbon factors should not be based on a sector average. In the current version of the bill, a facility’s allowances are based on the NAICS sector average of purchased electricity and GHG emission per unit of production. Unfortunately, NAICS codes encompass a broad variety of products and processes: this variation means that unlike products and processes are placed in the same sector category and the sector average is based on ‘apples to oranges’ comparisons. Given that the level of emission reductions is dependent upon the overall cap and not the allocation system, allowances based on a facility’s historical emissions should be allowed. This approach also provides a level of certainty as to the amount of the rebate for a period of years into the future.

Participation in Energy and Trade-Intensive Rebate Program - An individual facility should be permitted to petition to participate in the energy and trade intensive rebate program. The bill establishes a three-part test for energy, greenhouse gas and trade intensity for determining whether a NAICS sector is eligible for the rebate program. While this approach would work for some sectors, some facilities outside of a qualifying NAICS sector would be ineligible for the rebate even if the facility could meet three-part test. In addition, basing the individual showing criteria on products versus processes does not take into account situations where the same products can be made by various different processes. The bill should be modified to allow an individual facility to become eligible for the rebate program if the facility can satisfy the three-part intensity test.

“Quantity of Allowances for Energy and Trade-Intensive Rebate Program – The quantity of annual allowances dedicated to the energy and trade intensive rebate program should be expanded on a pro rata basis if the number of facilities that ultimately qualify for the program is larger than those that are presumably eligible. The program is currently funded with allowances on an annual basis. It is unknown how many sectors will ultimately qualify for the rebate program. In order to avoid the leakage of jobs, manufacturing capacity and emission to overseas markets, the rebate program must be funded at the appropriate level. At the current funding level, if more facilities are deemed eligible for the program, the level of funding for each facility would be diluted. The bill should be modified to a higher level of funding to the rebate program, on a pro rata basis, if the number of facilities that are ultimately deemed eligible becomes larger than the facilities included in the NAICS sectors that are ‘presumably eligible.’

Use of Indirect Carbon Factor for Purchased Steam - The indirect carbon factor should include both purchased electricity and purchased steam. The current methodology for calculating a facility’s indirect carbon factor only includes purchased electricity. The chemical industry projects that it will experience more than $750 million dollars annually in carbon costs passed through from upstream merchants of purchased steam. Steam accounts for approximately 33% of some industries’ purchased heat and power, as compared to purchased electricity, and steam is required for chemical process heating, equipment powering, and building heating and air conditioning. While many chemical facilities generate steam in their own boilers or combined heat and power (CHP) units, a significant number of facilities have transitioned over the last 25 years to purchase of steam from third-party CHP facilities. Since purchased steam is an alternative to fuel combustion for self-generated steam, purchased steam should be eligible for allowance rebates under the bill.”