The ongoing health care debate has delayed the anticipated consideration of climate change cap-and-trade legislation in the Senate. To re-set for those of you who haven’t paid attention in awhile, the House of Representatives passed the American Clean Energy and Security Act (ACES) of 2009 earlier this summer. The Senate is committed to take up the version of ACES that was passed by the House Energy and Commerce Committee as the basis for action in the Environment and Public Works Committee as well as several other panels that have subject-matter jurisdiction over bits of the bill.

When the logjam on health care will break, one way or the other, is something I am not smart enough to guess with confidence. But I can predict that the next pinball loaded in the Congressional process will be the ACES bill.

The ACES bill is 1400 pages of widely-varied content. Broadly speaking it addresses “clean” energy (Title I), energy efficiency (Title II), and climate change (Titles III and IV). The Senate already has marked up its own energy bill, so the new focus in “The World’s Greatest Deliberative Body” will be the climate cap and trade provisions and ancillary, but important, proposals for protecting the competitiveness of American industries.

Intel’s public position on climate change is that we believe it is an important global issue and we support a mandatory Federal program to address this challenge. We are agnostic regarding whether the best way to address the climate challenge is cap and trade, or a carbon tax, or some other policy response. We have been focused primarily on how we can help shape the eventual bill to create opportunities for Intel (Titles I and II, principally) and minimize our cost impacts (Title III and IV).

Our efforts to help shape the legislation are being conducted together with our colleague semiconductor companies in the Semiconductor Industry Association (SIA). We are working with Senate staff on a number of bill provisions, but two of these issues are both economically significant to Intel and of broad interest to other stakeholders in the policy debate.

The first issue is ensuring that we get credit for our significant early action in reducing our climate-related emissions over the last approximately ten years. In short, Intel has spent tens of millions of dollars in reducing our emissions of perfluorocompounds (PFCs). PFCs play a critical role in the photolithography process – you cannot make chips without them. But they are powerful global warmers and, recognizing that fact, we have reduced our total PFC emissions by more than 50 percent since 2000. On a normalized, per-unit-of-production basis, we have reduced our emissions by approximately 80%. These actions have taken place in a program documented in a memorandum-of-understanding between SIA and the US Environmental Protection Agency. These and other early emissions reduction actions were taken by Intel and other companies with the encouragement of public officials, including President Clinton and Vice President Gore.

We aren’t asking for automatic credit for our actions, but rather the chance to document the validity of our reductions to qualify for credit. The current ACES draft provides virtually no allowance “budget” for such credit and proposes eligibility criteria that would preclude crediting actions taken under our program with EPA. We think that is bad public policy which, if enacted into law, will have a chilling effect on the willingness of companies to respond to public officials’ enticements and take future, voluntary emissions-reducing actions to address other environmental issues.

The second issue is obtaining a quantity of free allowances to compensate for the fact that the ACES bill will increase our costs and, all else being equal, put US semiconductor producers at a competitive disadvantage relative to other companies in Asia (where climate regulations affecting our industry are not on the horizon) and Europe (which has excluded our PFC emissions from their climate programs).

The ACES bill would, in simplest terms, require greenhouse gas emitters to hold “allowances” (essentially permits) equal to their emissions. Some of those allowances will be given out free (e.g., to utilities to hold electricity price increases to a minimum) while others will be auctioned off (with the auction proceeds used to fund other programs like renewable energy sources). Some quantity of allowances will be set aside to provide, freely, to companies whose operations are either greenhouse gas-intensive, energy-intensive, or some combination of either and trade-intensive. The objective is to prevent “leakage” of emissions – the potential off-shoring of industries and their climate-related emissions as a result of the added costs of the ACES program.

The problem with the bill is that the formula used to determine which industries qualify allows industries that are greenhouse gas- or energy-intensive, but not very trade-intensive, to qualify for free allowances to combat an effect that is unlikely given their relatively low exposure to international trade. We are proposing that trade-intensity, set at a fairly high threshold, be added as a standalone qualifying criterion so that the semiconductor industry would qualify. Our sector’s trade intensity is on the order of 70-80%. That means that even relatively small cost increases, as a result of a bill like ACES, can have a much bigger effect on the margin.

My crystal ball is somewhat cloudy on whether the ACES bill will pass in the Senate. There would then be the question of whether the House and Senate could reconcile two different versions of the bill. But my guess is that it is more a question of when, than if, the bill passes. So we plan to keep on plugging away to make these and other improvements in the bill – again with the objective of maximizing our opportunities and minimizing our cost increases. Stay tuned…

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