Obama's Cap-and-Trade Plan

The U.S. Chamber of Commerce is gearing up to rally coal-state politicians to alter the President's plan to control carbon emissions

As a candidate, Barack Obama said he'd tackle climate change by imposing caps on emissions of greenhouse gases. Now, as President, he's doing exactly that. He proposes reducing U.S. emissions 14% below 2005 levels by 2020 and 83% below by 2050. And he'd raise $646 billion from 2012 to 2019 by auctioning the rights to emit such gases—in effect putting a price on carbon emissions. With Congress also serious about the climate, business knows the battle has been joined for real and is trying to shape a compromise bill likely to emerge this year. "We are now playing with live bullets," says the Environmental Defense Fund's Mark Brownstein, who works with a group of companies that supports the plan.

The bullets are already flying—but mainly over details of the plan, not the general idea. While there are still fierce opponents of emissions limits, such as the U.S. Chamber of Commerce, much of business is supportive. The Obama Administration "is very close to right on the climate plan," says John W. Rowe, chief executive of Exelon (EXC), a Chicago-based utility.

In theory, a workable cap-and-trade market for carbon emissions would give business executives more certainty about future energy costs, helping them make better investment decisions. A market price on carbon would boost energy efficiency and renewable energy efforts, already beneficiaries in Obama's stimulus package. Nuclear power plants, such as Exelon's, would become more valuable. "I have great hope for the 'green' stimulus, but it won't fulfill its potential unless there is a price on carbon," says James E. Rogers, chief executive of Duke Energy (DUK). Also, there's little chance of getting China and India to agree to binding limits, which American companies insist is needed to keep the international playing field level, unless the U.S. takes action at home.

The real fight, therefore, is not whether to impose carbon limits but how to do so and at what cost to business. Obama proposes that companies buy an allowance, or permit, for each ton of carbon emitted, at an estimated cost, to start, of $13 to $20 per ton. (Those permits could also be bought and sold.) Even at the lower range of $13 per ton, energy companies and utilities would likely pass along the added cost to consumers. It's estimated the price of gasoline would go up by 12 cents a gallon and the average electricity bill by about 7% nationally—and far higher in states more dependent on coal. Unfair, say many executives. "It is a clear transfer of the middle part of the country's wealth to the two coasts," says Michael G. Morris, CEO of American Electric Power (AEP), a coal-heavy power generator based in Columbus, Ohio, that supplies electricity in 11 states.

Morris intends to target the 50 U.S. senators in the 25 coal-centric states "to see if we can bring some rationality to the program," he says. The U.S. Chamber of Commerce, meanwhile, plans to hold "climate dialogues" in as many as 16 cities, hammering home a similar message in coal-rich states with Democratic senators. The Obama plan "is now a very expensive tax used to transfer wealth. It has nothing to do with climate change," charges William L. Kovacs, a Chamber vice-president.

The Obama team points out that its cap-and-trade plan returns much of the money raised by permit sales to consumers nationwide in the form of lower taxes, so many people come out ahead. And the Environmental Defense Fund has created a map of 1,200 alternative energy or energy-efficiency companies in key manufacturing states that stand to benefit from the climate plan. While the Midwest will bear a higher cost from reducing carbon emissions, the region will also benefit from the most new jobs, the EDF argues.

Lots of other details remain to fight over. Dow Chemical (DOW) and others want credit for emission cuts they have already made, for example. So prepare for months of negotiations. But a deal is likely. Says Dow lobbyist Peter A. Molinaro: "Somewhere out there is a rational policy that could actually get the votes."

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