Cap-and-Trade: Lobbyists Haven't Gutted It, Yet

Caps on carbon assure that emissions will decline, and the permit distribution hammered out by lobbyists looks pretty astute

The task of the utility industry once was simple: Produce electricity at low cost. Then came the environmental movement, which forced companies to pollute less. Now comes an even more sweeping demand: Cap-and-trade climate legislation in play in Congress would require dramatic cuts in greenhouse-gas emissions, reshaping the utility landscape. That's why companies are fighting hard to shape the rules to their best advantage.

The basic idea in a cap-and-trade scheme is that companies must have a permit, or allowance, for every ton of CO2 they emit. The number of permits is capped, and the cap gets lowered over time, reducing emissions.

The key questions: Who gets these permits, and how much do they have to pay for them? President Obama wanted permits to be auctioned at the start. Some companies, such as Entergy (ETR), with low-emissions nukes and natural-gas plants, like the idea. But coal utilities are adamantly opposed. It's unfair, says Duke Energy (DUK), which would have to spend more than $1 billion more than Entergy would to buy permits because of Duke's higher emissions.

Industry Devises a Compromise

But the industry also realizes it can't afford to keep fighting, not with Washington finally serious about tackling climate change. "The leadership in the House told us that if you don't get your act together, someone will come up with a remedy for you," says Ralph Izzo, CEO of Public Service Enterprise Group (PEG).

So, in an intense series of phone calls and meetings, CEOs and their trade group, Edison Electric Institute, hammered out a compromise. Roughly 33.5% of the permits would be handed to the electricity sector. Half of those would be given out on the basis of past emissions, benefiting the coal guys. The other half would be allocated based on past power generation, favoring those with lower emissions thanks to their nukes and natural gas.

The industry also added a clever twist. Executives knew that giving permits to electricity generators would be rightly perceived as a massive corporate windfall, which would hurt them politically. So companies proposed that the permits be handed out to so-called local distribution companies (LDCs), the folks that actually send you your electricity bill. The LDCs would sell the permits given to them, returning most of the money to customers to ease the pocketbook hit from higher electricity prices.

Once the proposed language was written, EEI took it to its biggest supporter in the House, Representative Rick Boucher, a Democrat from coal-heavy Virginia. Boucher managed to get the provisions into the final legislation, which passed the House on June 26. "Boucher was a great guy to have in the mix to do your bidding," says one industry lobbyist.

Not a Bad Deal—So Far

Some environmental groups scoffed that this was just one more powerful industry getting special favors. But American Electric Power (AEP) CEO Michael G. Morris is unapologetic. "When people talk about us having a lot of clout, well, you bet—we serve every constituent in the U.S.," he says.

Plus, the House legislation turned out to be not such a bad deal, economists say. Thanks to the hard cap, the emissions-reduction goals will be reached no matter who wins or loses when the permits are allocated. And the overall cost to society is the same. "There is a marvelous political safety value with a cap-and-trade system," explains Robert N. Stavins, director of the Harvard Environmental Economics Program. That's in stark contrast to a tax, which in theory is simpler. If a tax were to go though the same messy political horse-trading and vote-buying, it would end up so full of exemptions and giveaways that it would be toothless, says Stavins.

Even so, the cap-and-trade battle is just beginning. Industries and companies are already jockeying over the bill the Senate plans to take up in the fall. For it to have a chance of passing, Washington hands say, the timetables and targets of the House will have to be weakened. "At the end of the day, the Senate bill will be very different," says Morris.

Before it's here, it's on the Bloomberg Terminal. LEARN MORE