Cap-and-Trade Primer Goes to Washington, (DC)

We all know that the devil’s in the details when it comes to legislation and the American Clean Energy and Security Act, a.k.a. Waxman-Markey, is no exception. This 900-plus page proposal tackling climate change and clean energy is chock full of such fiendish facets.

We at Sightline Institute carefully studied the climate portion of the ambitious bill from Representatives Henry Waxman of California and Edward Markey of Massachusetts and prepared our new-and-improved Cap and Trade 101: A Climate Policy Primer to take a close look at what the bill proposes.

The primer will run you through the basic concepts of capping emissions and issuing tradable, carbon-pollution permits; it explains in (relatively) simple terms the moving parts involved in regulating carbon dioxide pollution; and it gives an assessment of Waxman-Markey’s likelihood of tamping down emissions while investing in renewable energy and protecting American consumers struggling to pay rising fossil fuel prices.

Download a free copy of the primer or two-page executive summary here.

In brief, here’s what we learned.

Waxman-Markey sets annual goals for US greenhouse gas reductions, calling for a decrease to 17 percent below 2005 levels by 2020, and a drop of 83 percent by 2050. We get there through a cap-and-trade program with these features:

• The legislation is comprehensive in scope, aiming to reduce emissions from essentially all fossil fuels, plus some select greenhouse gases that are extra-potent heat trappers. The bill would cover about 72 percent of US emissions in 2012, and it increases from there.
• Waxman-Markey targets fossil-fuel pollution at its source—regulating the pollution “upstream.” That means roughly 7,400 companies—including oil and natural gas suppliers and coal power plants—are the ones who have to get pollution permits, not small businesses or individuals.
• The permits have to be distributed somehow and Waxman-Markey initially auctions only about 15 percent of them, although the percentage rises to about 70 percent by 2030. Auctions are a good thing because they create a funding stream to invest in renewable energy and to help consumers cover higher energy prices. But while the other 85 percent of permits are given out for free, in many cases there are strings attached that require the recipients to give rebates to consumers when the permits are sold. That helps protect working families and ensure “climate fairness.”
• The bill gives polluters two ways of meeting pollution limits: by cutting their own emissions, or by paying for “offsets” in which carbon dioxide reductions are made elsewhere. It allows for a lot of these offsets—2 billion tons split between domestic and international projects (keep in mind that the amount of to-be-regulated US emissions totals about 6 billion). That means the amount of greenhouse gas emissions from permit holders could actually rise for more than a decade, if polluters purchased the maximum allowable offsets. But there’s lots of uncertainty in this area, including questions about what kinds of offsets will be allowed, how many will actually be available, and what they’re going to cost.
• Coming back to the fairness idea, the bill includes built-in protections for American families. In its early years, it gives 30 percent of permits to electric utilities and requires proceeds from their sale to be returned equally to all their customers. By 2030, 70 percent of permits will be auctioned and the money flows back to residents as rebates: 55 percent as equal rebates for all legal residents, and low-income families get the proceeds from an additional 15 percent of permits. Waxman-Markey also dedicates a small percentage of permit revenue to worker training programs and to fund renewable power and energy efficiency in buildings.

Overall, the bill is a mixed bag of proposals we like and dislike. (Sightline director Alan Durning dissects and grades the bill in his blog post “14 Things I Love—and 6 I Hate—About Waxman-Markey“). What’s next with the legislation? It was approved by the House Energy and Commerce Committee on May 21. The House Agriculture Committee held a hearing on the legislation last week, spending much time on the offsets issue. House Speaker Nancy Pelosi previously said she wanted the bill voted out of the relevant committees by tomorrow. And Politico is reporting that the White House wants action on Waxman-Markey by next week.

But what will happen in the US Senate is far from clear. Point Carbon has reported that Senator Barbara Boxer, chair of the Senate environment committee, wants to propose amendments to the bill before the summer recess, which could be as early as August 3, while other senators don’t expect the full Senate to vote on a bill before the end of the year.