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Caps, Trades and Offsets: Can Climate Plan Work?
Lawmakers, Scientists and Industry Debate House Measure

By David A. Fahrenthold
Washington Post Staff Writer
Tuesday, May 26, 2009

It sounds like alchemy, an act of bureaucratic magic. Under the climate-change bill just approved by a House committee, the U.S. government would literally make a commodity -- as tradable as a Pontiac or a pork belly -- out of thin air.

The bill would require polluters to obtain "allowances" -- permits allowing them to emit a given amount of a greenhouse gas such as carbon dioxide or methane. Today, these gases are invisible, free and floating all around us. This bill would put a price on them.

That would accomplish an economist's version of a triple back flip. It would divide a problem of the global commons into pieces and make those who use gas or electricity pay for their share of the emissions that result.

But a closer look through the bill's 940-plus pages shows that selling chunks of air still might not be its most radical idea. The proposal would also create official carbon "offsets" -- in some cases, a government-certified hypothetical calculation of an amount of gases that would have been emitted but were not. Those, too, could be bought by polluters.

As the legislation moves toward the House floor, Democrats are calling it a "jobs bill" -- because of new business activity they say the system would stimulate -- and Republicans are labeling it a "light-switch tax," because energy costs would go up. But neither characterization does justice to its ambitions, or its unknowns. The proposal is far more complex than anything tried before in this country, and a close parallel in Europe turned out to be seriously flawed.

"I've been through lots of meetings where Americans say, 'Well, we're going to do it right.' Well, no, you're not," said Mark Smith, an economics professor at Colorado College who has studied the European example. "You're creating an entirely new market, by the government, and there's a tremendous amount of political pressure being expressed in the design of this market."

But Smith, like many environmental groups, said these worries are not a reason to kill the plan. "Does that mean we should do nothing? I say no."

The bill has now passed two important Washington mileposts, one official and one symbolic.

The House Energy and Commerce Committee endorsed it Thursday night. And members of Congress showed that they now think climate change is important enough to horse-trade over.

To satisfy Democrats from states with coal mines or heavy industry that would be hit hard, committee leaders dropped their target for emissions reductions by 2020, from 20 percent to 17 percent. And they agreed that, instead of all credits being sold to the highest bidder, 85 percent would be given away.

This had the effect of simultaneously outraging both Greenpeace -- "If you give all the pollution credits away, it doesn't actually serve the market principle of making carbon have a cost," spokesman Michael Crocker said -- and House Republicans. The bill's complexity led one Republican to cite the adage that a camel is a horse designed by a congressional committee.

It may prove to be an elephant before long: The rest of the House and the Senate are waiting for their crack at it.

But for now, many environmental groups say they support the bill, because it still creates a "cap-and-trade" system. This requires polluters to amass credits equal to their emissions and then allows them -- and others, including Wall Street trading firms -- to sell them on an open market if they cut their emissions, giving them a surplus of credits.

"We have decided we're going to regulate the commons, which is the sky, or the air," said Liz Martin Perera of the liberal-leaning Union of Concerned Scientists.

And this is the best way, she said: "It is able to harness the power of the market, to find the cheapest reductions first. If it's going to be cheaper for me to reduce [emissions] than you, then I'm just going to go ahead and reduce and sell you my permit."

The United States already has a working cap-and-trade system, used since 1995 to cut back the gases blamed for acid rain. The Environmental Protection Agency says the trading system has reduced the overall cost of cutting acid-rain-causing pollutants to one-third of what was projected.

But comparing the two problems is like comparing a horn section and an orchestra.

Acid-rain pollutants can be sucked out of a smokestack by adding "scrubbers." But nothing like that is commercially available for carbon dioxide -- polluters might have to replace the coal they burn with a different fuel, or replace the coal-burning plants with solar "farms" and windmills.

Also, greenhouse gases come from far more sources: power plants, factories, car tailpipes, and both ends of a well-fed dairy cow (though the bill doesn't tackle that one: cows could still burp free of charge).

"I know cap and trade will work" in the abstract, said Gary Hart, an analyst for London-based Icap Energy, who traded acid-rain credits for Southern Co., the utility giant. But Hart said this program is so much bigger that "I can't say with, you know, 1,000 percent certainty, that this is going to work."

Another potential problem is that the bill requires the EPA to begin seeing the future.

It uses carbon offsets to expand the pool of available credits: Instead of buying an allowance to cover their pollution, a factory could buy an offset to negate it. An offset would be a certificate showing that, for example, emissions have been avoided, or taken up by newly planted trees, or captured and pumped underground.

But this is the tricky part: how can one be sure an emission was avoided?

"That's essentially unobserved, and fundamentally unobservable," said Robert Stavins, a professor of business and government at Harvard University. "I mean, who knows what you would have done?"

Because so much about this system is untested or unknown, experts disagree about how much cost will be passed on from utilities and oil refineries to average families. The EPA thinks it will fall between $98 and $140 per year, causing barely a stutter in the U.S. economy as a whole.

The Union of Concerned Scientists thinks the system will actually make money for families, since more efficient technologies will save on energy costs. But the conservative Heritage Foundation thinks it will cost big: $4,300 per family in a few decades.

And an even bigger question: Even if cap-and-trade works as a bureaucracy, will it work as a climate savior?

The European Union imposed a similar system in 2005, but experts say it was gamed. Countries claimed higher emissions than they really had at the beginning, so their mandated "cutbacks" often really weren't.

But Rep. Edward J. Markey (D-Mass.), one of the architects of the current bill, said he was confident that the measure will both reduce emissions here -- and send a signal to other countries at an international climate conference in Copenhagen in December.

"If we expect the Chinese and Indians and others to embrace an international system for reducing these gases, we must be the leader," Markey said.

With the new bill, he said, "we will no longer be preaching temperance from a barstool."

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