Senate's Climate Compromise Dodges `Cap and Trade'

Three senators trying to craft a compromise to remake the U.S. energy economy thought they had a way around the oil industry’s opposition to a “cap-and-trade” system for greenhouse-gas emissions.

Their proposal for an oil fee linked to prices on a carbon market was outlined by the senators on March 25. The idea had to be scrapped after opposition by colleagues to anything resembling a “gas tax” in an election year, according to Senator Mary Landrieu, a Louisiana Democrat.

A new solution to the oil-fee quandary was being negotiated yesterday by Senators John Kerry, Lindsey Graham and Joe Lieberman as they try to revive stalled efforts to pass legislation aimed at curbing global warming. The senators, who said they will outline their proposal publicly on April 26, have faced dozens of such challenges in the past year as they sought to win over both businesses and environmental advocates.

“If you go too far in one direction it could jeopardize my support, and I’m a strong proponent of this legislation,” Senator Ben Cardin, a Maryland Democrat whose concerns include the effects of offshore drilling on his coastal state, said in an interview.

The measure by Democrat Kerry of Massachusetts, Republican Graham of South Carolina and independent Joe Lieberman of Connecticut will scale back legislation that passed the U.S. House of Representatives last year. Instead of a cap-and-trade program covering almost every part of the U.S. economy, as the House proposed, only power plants would be covered initially. Other industries such as manufacturers would be phased in later.

Among provisions being weighed for the Kerry-Lieberman- Graham measure are the following, according to people familiar with the plan who asked not to be identified in advance of the announcement:

REDUCTION TARGETS: The bill will incorporate President Barack Obama’s goal of cutting U.S. greenhouse gases 17 percent by 2020 from 2005 levels, and 80 percent by 2050.

CAP-AND-TRADE: A cap-and-trade program would initially apply only to electric-power utilities. The market would enable companies to buy and sell rights to pollute and would be expanded later to manufacturers.

The utility-only emissions trading won’t be called “cap and trade” because that has “become a dirty word,” Joseph Aldy, an energy and economic adviser to Obama, said at an energy conference this month in Washington.

A price collar would be established to limit fluctuations in the price of carbon dioxide. The goal would be to keep prices at about $10 to $30 per ton. The bill also would call for consumer rebates to help people offset higher electricity prices.

How pollution permits would be allocated to polluters may be deferred for later.

OIL INDUSTRY: The latest proposal being considered would give the oil industry free pollution allowances that would expire by a certain date, after which allowances would have to be purchased. The Congressional Budget Office would be called upon to certify the mechanism wasn’t a tax.

PREEMPTION: State and regional cap-and-trade programs, such as one that operates in the U.S. Northeast, would be suspended in favor of a federal emissions-trading system. Senators including Susan Collins, a Maine Republican, and Mark Udall, a Colorado Democrat, say they oppose such a state preemption.

The legislation also would bar the Environmental Protection Agency from regulating carbon emissions. The agency last year began the process of establishing regulations.

OFFSETS: The bill is likely to include carbon offsets. These are emissions reductions from unregulated sources, such as farms and rainforests, that polluters can purchase in lieu of pollution permits in a cap-and-trade program.

Offsets are critical to securing business support because the U.S. energy industry won’t be able to make big pollution reductions until cleaner technologies are proven to be cost- effective, James Rogers, the chief executive officer of Duke Energy Corp. and a supporter of climate-change legislation, said in an interview. Some lawmakers oppose offsets that would allow money to be spent on pollution cuts outside the U.S., Senator Bernie Sanders, a Vermont independent, said in an interview.

“It’s very hard to explain to an American citizen that we’re giving some company an offset and it’s going to result in an investment in another country,” he said.

TRADE: The bill would offer protections for energy- intensive businesses against losing out to imports from countries that don’t have equally stringent pollution restrictions.

NUCLEAR: The legislation may add to federal loan guarantees aimed at expanding the U.S. nuclear energy industry. Graham has called the nuclear provisions the “crown jewel” of the bill.

DRILLING: Expansion of oil and gas drilling off parts of Alaska and portions of the East Coast would be included, in keeping with a proposal by Obama. The bill may call for states to share in some of the state revenue generated from drilling, an issue that divides lawmakers.

COAL: Federal money would be offered to help coal companies develop clean technology, including “carbon capture and sequestration.”

To contact the reporters on this story: Kim Chipman in Washington at kchipman@bloomberg.net; Simon Lomax in Washington at slomax@bloomberg.net; Jim Efstathiou Jr. in New York at jefstathiou@bloomberg.net.

John Kerry, a Democrat from Massachusetts and chairman of the Senate Foreign Relations Committee, listens during a hearing on global health in Washington, D.C., on March 10, 2010. Photographer: Andrew Harrer/Bloomberg

Chart: Cap-And-Trade Explained