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House Energy Bill Seeks to Cap Greenhouse Gases

The economy may be in the tank, but that hasn't stopped Washington from taking aim at global warming. First, President Barack Obama lived up to his campaign promises by including caps on emissions of greenhouse gases in his proposed budget, and telling his Environmental Protection Agency to start moving on regulations under existing laws. Now, House Energy & Commerce Committee Chairman Henry A. Waxman (D-Calif.) has fulfilled his promise to move aggressively on climate legislation. On Mar. 31 he and Representative Edward J. Markey (D-Mass.), chairman of the energy and environment subcommittee, released a draft of a massive 648-page bill that tackles both climate and energy. "This legislation will create millions of clean energy jobs, put America on the path to energy independence, and cut global warming pollution," Waxman claims.

On the energy front, the proposal takes the controversial step of requiring 25% of all electricity to come from renewable sources (or energy efficiency steps) by 2025. It promotes a "smart" transmission grid, more energy-efficient buildings, higher-mileage cars, and training programs for green jobs. But the climate provisions are getting the most attention, prompting a flood of responses from environmentalists and business groups.

Aggressive Timeline for Cutting Emissions

The draft follows the standard "cap and trade" model. Companies and industries must have a permit (or allowance) for every ton of carbon dioxide (or the equivalent in other greenhouse gases) they emit. The number of permits would be reduced over time, so that emission would be down 20% below 2005 levels by 2020 and 83% below 2005 levels in 2050. That's in line with the recommendations of companies like BP (BP), Caterpillar (CAT), Dow Chemical (DOW), and Siemens (SI), which have banded together to support climate action. It's even in line with environmentalists' goals. This is the first bill that ratchets down emissions as quickly as the scientists of the Intergovernmental Panel on Climate Change (IPCC) say is needed to prevent catastrophic changes, green groups say. Environmentalists also say they like the fact that a substantial amount of money is set aside to reduce deforestation around the world, which is responsible for 20% of all emissions.

But from there, the legislation gets more controversial—and more problematic. It's not clear yet how many of the permits to emit carbon dioxide would be auctioned right from the start under the bill. But many companies—even those that support climate legislation. Business wants at least some of the permits to be handed out to industries to ease the transition to a low-carbon economy. Otherwise, executives like Duke Energy (DUK) CEO Jim Rogers argue, coal-heavy utilities would have to jack electricity prices way up and switch to natural gas, rather than develop greener technologies.

Environmentalists Say Offsets Go Too Far

In addition, business interests that are less supportive of action on climate change are already arguing that the U.S. can't afford the legislation. "As the economy enters another year of recession, an across-the-board increase in energy prices makes recovery all the more difficult," says Scott H. Segal, a partner at Bracewell & Giuliani, a law and lobbying firm.

On the other hand, portions of the draft bill have environmentalists grousing as well. Under the cap and trade system, companies can buy and sell permits. That way, companies can buy more permits if they can't make enough reductions themselves to stay under the caps. This market system helps reduce overall costs. But to ensure that costs don't go too high, the Waxman draft allows what's known as "offsets." A company could emit more than it has permits for if it can get "offsetting" reductions elsewhere, such as retrofitting a factory in China to cut its emissions. The bill allows up to 2 billion tons of carbon dioxide in offsets.

That's unacceptable, say green groups. Two billion tons is one-quarter of all U.S. emissions, explains Steven Biel, global warming campaign director for Greenpeace USA. By using offsets "the U.S. wouldn't have to reduce its own emissions for more than 20 years," he says. "The offsets could blow up the whole bill."

So expect some contentious hearings as Waxman and Markey move the bill forward on an aggressive schedule. They are planning subcommittee markup by the end of April, and full committee markup by mid-May. And some companies, at least, are happy about that. "We appreciate…the priority the Chairmen are placing on this important issue," said a statement from the U.S. Climate Action Partnership (USCP), a group of 25 companies and several environmental groups.

Carey is a senior correspondent for BusinessWeek in Washington.

Carey is a senior correspondent for BusinessWeek in Washington.

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