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Dissecting Waxman's Climate Compromises

Last week, Henry Waxman had to tack on a slew of compromises to his big climate and energy bill in order to win support from coal- and oil-state Democrats on the House energy committee. In the end, he finally got his bill assembled, and the mark-up process will begin later this afternoon. (Here's the full text.) So let's start dissecting, shall we? One of Waxman's biggest compromises, the one attracting the most attention, was that roughly 85 percent of the pollution permits under the bill's carbon cap-and-trade system will be given out to companies for free, rather than auctioned off by the government. (Read Kevin Drum's primer on cap-and-trade if you need a refresher on this topic.)

Anyway, Greenpeace has deemed this bargain intolerable, saying the bill now "threatens to do more harm than good." I don't think that's quite right, but let's note a few things here. First, what Joe Romm says: It's true that Europe originally handed out a lot of its permits for free, too, but this is not why Europe's cap-and-trade regime flopped during its first few years. Europe's biggest mistake was that regulators set the initial overall cap on pollution way too high. They essentially issued too many permits—more permits than there were actual carbon emissions—which meant that the price of carbon crashed and fell to nearly zero, and no one had any incentive to reduce emissions. This was a problem with the cap itself, and it happened because the regulatory authorities didn't have good information about emissions in the EU.

The United States should fare better on this score—our Energy Information Administration has fairly good emissions data, and the EPA is working to get even better data. And as long as the overall cap on greenhouse-gas emissions is set correctly, emissions should come down, regardless of whether the permits are auctioned off or doled out freely. The cap is the cap, and it means that there are a fixed number of permits, and hence a fixed amount of carbon that can be emitted across the country.

Another point of note. In Europe, utilities that received free permits still raised their electricity prices, rather than passing on the savings to consumers. They did this because there was still the opportunity cost of not selling the permits. The result was that many of them earned tidy profits. Here in the United States, utilities will also get most of their allowances for free. But it's not clear they'll just be able to raise prices at will, because many of them are tightly regulated. They'll likely be forced to pass on the savings to consumers. Richard Morgan of the National Association of Regulatory Utility Commissioners has a lot more on this point in this E&E interview.

Granted, the whole question of how you distribute permits still very much matters. If Congress auctioned off all or most of the pollution permits under a cap-and-trade system, companies would have to pay more for the allowances, and the U.S. government would raise more revenue. That'd be money Congress could then rebate directly back to consumers to soften the blow of higher energy prices; or it could spend some of the money on clean-energy research or efficiency projects (many of which won't necessarily come about just because there's a price on carbon). Right now, there's less money in Waxman-Markey for both of those things.

Now, all that said, I'm genuinely curious what Greenpeace's strategy is here. Waxman-Markey isn't ideal from an environmental standpoint, but it would still represent a huge, huge step toward regulating greenhouse-gases and promoting cleaner forms of energy. It was weakened because fossil-fuel Dems have a lot of say on the committee (and there are virtually no Republicans who care about global warming), and various companies shelled out a whole lot of money lobbying to shape the legislation. Does Greenpeace think if this bill sinks they could get an even stronger one, with more aggressive targets and fewer handouts for companies? That all the lobbyists can somehow be made to disappear? How?

P.S. Here's the full rundown of how pollution allowances are getting divvied up in the bill.

--Bradford Plumer