Who Gets to Pollute?

| Mon Oct. 26, 2009 9:57 AM EDT

Who gets to spew carbon dioxide into the air for free, and who has to pay for the right?

The first draft of the Senate version of the climate change bill left a number of unanswered questions, including the much-discussed allocation of pollution permits under a carbon-pricing plan. Exactly which industries will get pollution permits has been a hot topic among senators who haven't decided how they're going to vote. The fence-sitters got the information they were waiting for late Friday, when Sen. Barbara Boxer (D-Calif.) released her "chairman's mark." The mark is the version of the bill that Boxer wants the committee to use as a baseline when it considers the legislation, which is cosponsored by Sen. John Kerry (D-Mass.)

Boxer's Environment and Public Works Committee will begin hearings on the bill on Tuesday with testimony from a panel of top officials: EPA administrator Lisa Jackson, Energy Secretary Steven Chu, Transportation Secretary Ray LaHood, Interior Secretary Ken Salazar, and Federal Energy Regulatory Commission Chairman Jon Wellinghoff. Hearings will continue nearly all day on Wednesday and Thursday, and the President will weigh in, too, with a major speech on Friday and another planned for Tuesday. But Boxer's "mark" sets the stage for what everyone will be talking about.

Here's what you need to know:

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Credit allocation in the new version is very similar to the House bill. (The new bill and supporting documents are all posted on the EPW site.) The easiest way to think about the distributions is that they assign a value to all the carbon emitted in the US, which would be broken down into permits. Each permit has a monetary value, and it also represents a specific amount of carbon that can be emitted. Emitters will need to acquire those permits, either by purchasing them or receiving a free allocation, but other entities are also given permits that they can sell on the market and make use of the proceeds.

As in the House bill, the Senate version gives local electric distribution companies (LDCs) 30 percent of the distributed allowances, and will be required to pass the value of those credits to consumers in order to protect them from any resulting energy price spikes, likely through rebates. Groups like the National Association of Regulatory Utility Commissioners, the national organization that represents the state boards that regulate LDCs, have advocated for providing a large portion of the credits to distributors, arguing that they can best protect consumers from increased costs.

A significant portion of the value of credits is distributed to energy distributors other than LDCs, with the goal of protecting their customers from energy price increases. Five percent will go to merchant coal generators and electricity providers with long-term power purchase agreements. Natural gas distribution companies get 9 percent, home heating oil users get 1.5 percent, and rural electric co-ops get 0.5 percent of allocations. Those free allocations will phase out between 2026 and 2030.

There's also a direct rebate program, used to offset the costs for the most vulnerable households. Fifteen percent of allocations will be sold off to polluters in the early years of the program, with the proceeds going to low- and moderate -income households through rebates to offset price increases. Later in the program, the direct rebate program expands, with more than 50 percent of credits auctioned starting in 2035 and proceeds distributed to all energy consumers. This is the approach that advocates for low- and moderate-income families have called for, like the Center on Budget and Policy Priorities. The direct-to-consumer rebate both protects people from price spikes, and it creates an incentive to reduce energy use (whereas, with LDC allocations, consumers wouldn't see the rate increase and thus have less of an incentive to reduce use).

Like the House bill, the Senate legislation also includes protections for industries that both use a lot of energy and must compete with other countries, like steel, paper, and cement. They get 4 percent of the allowances in the first years, scaling up to 15 percent in 2014. Oil refiners will receive 2.25 percent of allowances in the initial years. Electric utilities will receive allowances to help pay for the cost of installing and operating carbon-capture-and-storage technology. And states also receive a portion of the distributed allowances in the first two years, to use for purchasing renewable energy and investing in energy efficiency, and another portion will be used to support research into advanced energy technologies.

The bill also includes funding for international adaptation, to help countries who will feel the direct impacts of climate change, and funding to provide clean energy technology for developing countries. These provisions are seen as key in helping secure an international agreement, as they will provide incentives for developing countries to join in. Through 2025, 5 percent of allowance value will be devoted to preventing tropical deforestation. Through 2021, 2 percent of allowance value will be allocated for international adaptation and clean technology transfer, which increases to 8 percent after 2027.

There are also allocations for clean transportation technology, agriculture and forestry carbon reduction programs, state emission reduction programs, natural resource protection, deforestation prevention, and worker training programs. Those allocations are intended to support programs that compliment the cap on carbon.

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