Congressmen Henry Waxman and Ed Markey today released their long-awaited "discussion draft" of the American Clean Energy and Security Act - a bold starting point for passing comprehensive energy and climate legislation through Congress this year.

Release of the draft starts an eight-week sprint to negotiate and adopt a bill in the House Energy and Commerce Committee, which Rep. Waxman chairs. Waxman and Markey (head of the key Subcommittee on Health and the Environment) have pledged to complete work on a bill by Memorial Day. Speaker Nancy Pelosi has promised action by the full House of Representatives later this year.

The draft bill draws heavily on recommendations of the U.S. Climate Action Partnership, the business-environmental coalition that supports enacting climate legislation this year. It is also consistent with the legislative principles announced last week by the labor-environmental Blue-Green Alliance. NRDC is a member of both groups.

Here's our first read of the details of this important and bold draft legislation, compiled with the help of NRDC's crack team of energy and climate experts. First, some top-line observations:

The draft combines standards and incentives for rapidly deploying clean energy and energy efficiency technologies with firm economy-wide limits on the carbon pollution that is driving global warming. Investments in clean energy and energy efficiency will help power our economic recovery, cut consumers' energy bills, create good-paying green jobs, and lower the cost of meeting carbon limits. A steadily declining cap on carbon pollution will enable America to lead again in world-wide efforts to avoid the worst effects of global warming.

While the 648-page draft provides detailed proposals on most issues, it is deliberately open-ended on how to distribute the valuable emissions "allowances" that polluters must have at the end of each year to cover their global warming emissions. How many will be given away, and with what performance conditions? How many will be auctioned, and how will the revenue be used? Congressmen Waxman and Markey have left these key questions for discussion and negotiation with other members of their committee.

As a member of both USCAP and the Blue-Green Alliance, NRDC believes it is critical that the formula for distributing allowances must lead not to private windfalls but to achieving public objectives. The Waxman-Markey draft opens the door to using the value of the allowances for a wide range of critical needs - supporting investments in the clean energy economy, protecting consumers (especially low-income consumers), dealing with unavoidable climate change impacts, and doing our part to achieve international cooperation against global warming.

Now let's dive deeper into the details. The bill has four titles: Clean Energy, Energy Efficiency, Reducing Global Warming Pollution, and Transitioning to a Clean Energy Economy. Highlights of each section:

Title I - Clean Energy

Renewable energy standard. The draft requires an increasing percentage of electricity sold by utilities to come from renewable sources, reaching 25 percent by 2025.

Broad coverage. Includes retail electric utility service providers -investor-owned, municipals, rural cooperatives - who sell at least 1 million megawatt-hours of electricity each year.

Compliance flexibility. Allows utilities to meet their obligations by buying, selling, and trading federal Renewable Energy Credits (RECs).

Extra credit for distributed resources. Provides three times the amount of RECs for electricity generated by distributed renewable sources such as solar photovoltaics.

Protects state RPSs. The bill provides that the federal RES will not interfere with individual states RPSs and associated policies.

Critical lands and habitat protections. Certain resources, such as old-growth and mature forests, are excluded in order to protect critical lands and habitats.

Governor's petition. Governors may petition to reduce a utility's RES requirement by up to 20 percent in any given year if all entities in the state subject to the Energy Efficiency Resource Standard (EERS) established by Title II of the draft bill are in compliance that year.

Carbon capture and storage. The draft bill creates an integrated program modeled on USCAP recommendations to assure new coal plants will employ carbon capture and storage (CCS) technology to cut their global warming pollution.

CCS safety regulations and demonstrations. EPA is to issue CCS regulations to safeguard health and environment and prevent atmospheric releases from underground reservoirs. DOE and FERC are to study CO2 pipeline needs and barriers. A Carbon Storage Research Corporation is tasked with the research and development of new CCS technologies and some early demonstrations, financed through a small "wires charge" on existing fossil generation.

CCS deployment incentives. A 10 year carbon intensity assessment program is established to provide $1-1.1 billion annually for research, development, and demonstration of carbon capture and storage technology. Additionally, a larger scale performance-based deployment program is authorized that would reward companies based on the volumes of CO2 captured, with higher levels of compensation provided for early projects and higher capture rates.

Coal-fired power plant standards. New coal-fired power plants have to emit less than 1,100 pounds of CO2 per MWh if permitted after 2015, less than 800 pounds of CO2 per MWh if permitted after 2020. Plants permitted between 2009 and 2015 have to comply withthe 1,100 pounds limit within 4 years of start-up if certain targets for operational CCS capacity are met.

Clean fuels and vehicles. The draft encourages clean vehicles and fuels through a mixture of incentives and standards - promoting energy security and curbing global warming by minimizing our reliance on oil.

Low carbon fuel standard. The draft bill improves on the existing renewable fuels standard through 2022 with safeguards against dirtier fuels. The bill then phases in a low carbon fuel standard (LCFS) to cut the lifecycle emissions intensity of transportation fuels by five percent in 2023 and 10 percent in 2030.

Plug-in Electric Vehicle Deployment. The draft requires electric utilities to plan for an electric vehicle infrastructure, including charging stations and battery exchanges. It directs the Energy Department to develop a large-scale plug-in hybrid vehicle program in selected regions. It also provides financial support for domestic production of plug-in hybrids vehicles, supporting assembly plant retooling and domestic battery production.

Passenger car standards. The draft bill directs the President to use existing statutory authority to set vehicle performance standards for light-duty vehicles, to the extent practicable, harmonizing fuel economy standards set by NHTSA and greenhouse gas emissions standards set by EPA and California. Standards have to achieve at least as much emissions reductions as would California's standards, and California's authority to set future standards is preserved. EPA is also directed to set greenhouse gas standards for heavy-duty vehicles, marine vessels, locomotives, and other vehicles. The bill also authorizes EPA's SmartWay program to improve passenger and goods transport.

State Energy and Environment Deployment ("SEED") Fund. The draft creates a fund for managing federal financial assistance to states related to clean energy, energy efficiency and climate change, including appropriations for weatherization assistance, State Energy Program funds, and recovery bill funds.

Smart grid and electricity transmission. The draft bill encourages deployment of a smart grid, with measures to reduce utility peak loads. It also seeks to develop home appliances with the capability to interact with the smart grid. The Federal Energy Regulatory Commission is directed to reform regional planning to modernize the electric grid and provide for new transmission lines to carry electricity generated from renewable sources. Transmission needs assessments must take into account both demand and supply options.

Federal renewable energy purchases. The draft authorizes federal agencies to sign contracts of as long as 30 years for purchase of renewable energy.

Title II - Energy Efficiency

Building energy efficiency. The draft calls for a 30 percent improvement in the next version of widely-used model energy codes for new commercial buildings (ASHRAE) and homes (IECC), and a 50 percent improvement after 2016. The Energy Secretary is authorized to adjust the code if these organizations don't. States have to adopt them within one year, and then show compliance to receive certain funds. The bill would allow states to implement nationally-consistent energy retrofit programs for residential and commercial buildings, with the rules set by EPA and money handled by DOE. Both programs would be performance-based, meaning that greater energy savings reap larger incentives. A rebate program is created to purchase and destroy certain pre-1976 manufactured housing and replace it with EnergyStar manufactured homes. The draft also creates a building energy performance labeling program.

Lighting and appliances. The draft sets efficiency standards for outdoor lighting and portable light fixtures, and for water dispensers, hot food cabinets, and spas. More far-reaching changes are made to the DOE appliance energy standard-setting process to strengthen future standards for products already regulated. The draft establishes a "best-in-class" appliance deployment program, with incentives to retailers and a prize ("golden carrot") program for manufacturers of super-efficient appliances. Early retirement bounties also have been added.

Transportation efficiency. The draft bill changes the direction of transportation planning and investment by requiring regions to set greenhouse gas emission reduction goals, revising them every four years; investing in public transportation, technology and other measures to reduce emissions; making regional plans available to the public via the internet; and authorizing a competitive grant program for regions implementing these plans.

Energy efficiency resource standard. The draft bill requires natural gas and electric utilities to accomplish energy savings equal to 10 and 15percent, respectively, of their sales by 2020. Eligible energy savings include end-use customer savings, increased distribution efficiency, savings attributable to combined heat and power, and savings achieved through efficiency codes and standards.

Industrial energy efficiency. The draft authorizes DOE to make awards for innovative energy recovery methods, such as efficient motors, combined heat and power, and process engineering. The awards can be as much as one fourth the value of the energy projected to be recovered or generated during the first 5 years of a facility's operation.

Title III - Reducing Global Warming Pollution

Economy-wide emission reduction goals. The draft bill places firm limits on emissions of carbon dioxide and other designated heat-trapping pollutants. Targets are based on USCAP recommendations:

Year Reduction below 2005 levels

2012 3%

2020 20%

2030 42%

2050 83%

Supplemental reductions. Emissions are reduced further through international agreements to slow tropical deforestation (which accounts for a fifth of global carbon emissions), funded by auctioning a fraction of the emissions allowances. Criteria are included to set declining rates of deforestation as the baseline for supplemental emission reductions. By 2020, the goal is to achieve supplemental annual emission reductions equal to 10 percent of U.S. 2005 emission levels.

Scientific review. The National Academy of Sciences is tasked to review the targets periodically in light of the best available science, and the President is to recommend program changes to Congress.

Firm pollution limits on covered sources. Sources representing about 85 percent of U.S. carbon emissions are covered by a firm limit - a cap - on their emissions. Electric generating units and fuel refiners and importers are covered starting in 2012, major industrial emitters in 2014, and natural gas local distribution companies in 2016.

Cost control. The draft bill includes cost-control provisions, mostly modeled on USCAP recommendations:

Emissions trading and banking - proven tools for lowering costs developed in the acid rain program and other programs.

Emissions offsets - reductions achieved from domestic and foreign sources outside the cap - provide further cost control. Offsets are allowed in amounts of up to two billion tons per year. The draft bill seeks to assure that offsets are high-quality and produce environmental progress as well as cost-reduction.

An Offsets Integrity Advisory Board is created to help assure that reductions are real, enforceable, and would not have happened anyway.

Effective agreements are required with other countries to assure international offset quality.

When offsets are used, firms must turn in 1.25 tons of credits for each ton of emissions from covered sources they wish to offset.

Strategic reserve - A pool of emissions allowances is established to address the potential for spikes in carbon prices. Allowances are to be auctioned from the strategic reserve if allowances prices reach double the value predicted by EPA in the early years, or double their historical price once the program has been in operation for three years. The strategic reserve pool would be funded using 1% of allowances from 2012-2019, 2% from 2020-2029, and 3% thereafter. There would be limits on how much of the reserve pool can be drawn down in any one year. Ways are provided to supplement the strategic reserve with international offsets.

Carbon market regulation - The draft bill gives the Federal Energy Regulatory Commission responsibilities to protect against market manipulation. Key requirements include limiting any emitting company to holding no more than 110 percent of its prior year's emissions, and limiting any person from holding more than 10 percent of the allowances issued for any one year, or more than 20 percent of the allowances soled in any one auction. Similar limits are placed on derivatives.

Disposition of allowances. The draft bill creates a skeletal framework for distributing allowances - some by allocation, and some by auction. As mentioned at the outset, however, the details are mostly left blank for future negotiation within the Energy and Commerce Committee.

Additional GHG standards. The draft provides for setting new source performance standards (NSPS) for categories of emission sources not covered by the cap, using EPA's existing Clean Air Act authority. These standards will provide for use of the best demonstrated technology to reduce emissions. EPA has authority to decide which types of sources to cover, so long as they bring the total program coverage (sources under the cap plus sources subject to NSPS) to 95 percent of the heat-trapping emissions from industrial sources.

HFCs. Separate limits are established for hydrofluorocarbons (HFCs) under existing Title VI of the Clean Air Act (which regulates related ozone-depleting chemicals), with a faster emission reduction schedule and a specific allocation and auction system.

Black carbon. The draft creates a program to reduce domestic and international emissions of black carbon.

State authority. In general, the draft bill strenuously protects state authority to establish clean energy, energy efficiency, and greenhouse gas control programs that are more stringent than federal requirements. The one exception, however, is a six-year suspension (from 2012 through 2017) of authority to impose state cap and trade programs. (We will work with the states and the committee to clarify the intent of this provision.)

Title IV - Transitioning to a Clean Energy Economy

This portion of the draft bill authorizes a number of programs that may later be funded, depending on committee negotiations, by allowance allocations and auction revenues.

Preserving domestic competiveness. The draft adopts the Inslee-Doyle proposal for transitional rebates to certain energy-intensive manufacturing facilities making basic commodity products that are subject to strong international competition. The goal is to counter pressures to shift production, jobs, and emissions to countries that do not have carbon emission reduction programs. Rebates cover both direct and indirect (e.g., electricity-related) emissions and are based on a formula based on an industry benchmark emission rate and facility-specific output data.

International reserve allowances. A second provision addresses international competition concerns. Not later than 2017, the President is to report to Congress onthe impact of the "Inslee-Doyle" program on specified energy-intensive. If negative impacts are found on these industries, then starting in 2019 U.S. importers of competing products must purchase special allowances to cover the emissions associated with their imports. Products from least developed countries and countries responsible for less than a half percent of world GHG emissions are exempted.

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