Senate Climate Proposal Would Expand Oil Drilling, Reduce CO2

Senators John Kerry and Joseph Lieberman unveiled legislation today to expand offshore oil and natural-gas production, as well as reduce greenhouse-gas emissions by 17 percent this decade from 2005 levels.

The bill attempts to remake the nation’s energy sector amid widening political fallout over the growing oil slick in the Gulf of Mexico. It offers U.S. states financial incentives to open their coastlines to more drilling while steering the U.S. economy toward domestic energy sources that don’t produce the pollution that scientists have linked to climate change.

“This is going to change the face of American energy,” Kerry, a Massachusetts Democrat, said today at a press conference with the chief executives of power companies Duke Energy Corp. and FPL Group Inc. and Honeywell International Inc., which makes thermostats and energy-efficiency products.

The legislation aims to cut U.S. oil dependence on the Organization of Petroleum Exporting Countries 40 percent by 2030, according to a person familiar with the bill. It would meet its emission reduction goal by creating a market for pollution rights and setting maximum and minimum prices for government-issued pollution allowances.

Obama Backing

President Barack Obama endorsed the legislation, saying it would “put America on the path to a clean energy economy that will create American jobs.” He called on the Senate to pass the bill this year.

Duke’s James Rogers, FPL’s Lew Hay, Honeywell’s David Cote and the heads of two national environmental organizations appeared at the news conference with Kerry and Lieberman, a Connecticut independent.

While environmental groups have seized on the Gulf oil spill to press Congress to pass a global-warming bill this year, the April 20 explosion on a rig leased by BP Plc has set Kerry and Lieberman back, Kevin Book, a managing director at Washington-based policy analysis firm ClearView Energy Partners LLC, said in an e-mail today.

‘Political Toxin’

While offshore drilling “once greased the wheels of the grand bargain” between the energy industry and environmentalists over greenhouse gas limits in the U.S., it’s now “a political toxin,” Book said.

Kerry and Lieberman lost the bill’s only Republican supporter, Senator Lindsey Graham of South Carolina, who said last week it is impossible to pass a climate-change bill without offshore drilling expansion. Graham initially withdrew his support to protest a Democratic plan to take up immigration legislation this year.

Graham said today that it would be difficult for “transformational” energy and climate legislation to garner bipartisan support. He pledged to review the bill closely.

Some Senate Democrats, including Florida’s Bill Nelson and New Jersey’s Frank Lautenberg, have said they’ll oppose climate legislation that expands offshore drilling near coastal states.

“I start out with a bias against drilling and I intend to support that safety for my state,” said Lautenberg.

The spill “upended everybody’s strategies about working on energy reform this year,” Sarah Binder, a congressional specialist at the Washington-based Brookings Institution, said in an interview. Kerry and Lieberman will find the loss of Graham “very hard to overcome,” she said.

Pickens’ Encouragement

Kerry touted the encouragement the pair have received from billionaire energy hedge fund manager T. Boone Pickens, whose proposal for fueling trucks with domestically produced natural gas instead of diesel refined from foreign oil is incorporated in the bill.

“Achieving energy security is not easy and I applaud their focus on a broad energy package,” Pickens, chairman of Dallas-based BP Capital LLC, said in an e-mail.

A bill that promotes domestic energy sources “can help us get our economic mojo back,” Duke’s Rogers said at today’s press conference.

Democrats from manufacturing states want to strengthen provisions designed to protect energy-intensive industries like paper and aluminum from foreign competition. “The bill needs to improve,” said Senator Sherrod Brown, a Democrat from Ohio.

‘Thousands of Jobs’

FPL would create “thousands and thousands of jobs” if Kerry and Lieberman’s legislation became law and put “renewables on a level playing field with other sources of energy that emit carbon,” Hay said.

Kerry, Lieberman and Graham joined last year to overhaul a bill that stalled in the Senate after it narrowly passed the House. The House bill would have regulated the emissions from almost every sector of the U.S. economy with a cap-and-trade program in which companies would buy and sell a declining number of pollution rights.

The new bill matches the House bill’s goal of cutting carbon dioxide and other greenhouse gases 17 percent below their 2005 level by 2020. Republicans and some Senate Democrats say that proposal would raise energy prices and cost jobs as the U.S. economy emerges from the worst recession in seven decades.

Emissions Trading

The Senate bill would set up an emission trading program for utilities starting in 2013. The utility sector would get free allowances as the program began, which would be phased out by 2030.

Kerry and Lieberman’s proposal would hand out 75 percent of the allowances to utility companies based on past carbon dioxide emissions and 25 percent on the basis of electricity sales, according to a summary of the bill.

Factories and other “industrial sources” would join the cap-and-trade program in 2016. They would also receive free allowances to shield them from higher costs.

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.

The cash market for allowances and government-run sales of pollution rights would be mostly restricted to companies that own the 7,500 power plants and factories covered by the cap-and-trade program.

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.

‘Science Fiction’

The National Petrochemical and Refiners Association called the bill a work of “science fiction” that would “overtax and overregulate the domestic refining and petrochemical industry into extinction.”

Jack Gerard, chief executive officer of the American Petroleum Institute, said the trade group will study the measure before taking a position.

The Hague-based Royal Dutch Shell Plc commended Kerry and Lieberman in a statement, saying the plan boosts “home-grown energy, provides transparency for consumers and enables American refiners to compete against imports of diesel and gasoline.”

The bill includes $54 billion in loan guarantees for nuclear plant construction and $2 billion a year in funds for carbon-capture technology. It would block the U.S. Environmental Protection Agency from enforcing some greenhouse gas regulations that are planned under existing laws.

The measure will need “significant bipartisan cooperation” to pass, Senate Majority Leader Harry Reid, a Nevada Democrat, said today in an e-mail. Senate Republican Leader Mitch McConnell of Kentucky said in an e-mail he will oppose it.

“Whatever its intentions, this bill is little more than a job-killing national energy tax,” McConnell said.

To contact the reporters on this story: Simon Lomax in Washington at slomax@bloomberg.net; Lisa Lerer in Washington at llerer@bloomberg.net;

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