Fiona Harvey Waxman-Markey: Key components of the bill

So the cap-and-trade bill trundles on through the US legislative process with the House of Representatives Energy and Commerce Committee last night voting through the much-mauled bill.

The bill itself is about 1,000 pages long, which gives an insight into the complexities of getting enough support together to ensure its passage through the committee stage.

It swelled in size under the influence of scores of amendments, many of which have been criticised as attempts by state representatives to win benefits for their states, such as free carbon permits for coal-fired power generators.

If successful in the rest of its passage through the House, and if the administration succeeds in pulling together enough Senate votes, then the most important effect of the bill will be to introduce to the US a federal system of greenhouse gas emissions trading for the first time.

This would mean emissions from fossil fuel electricity generators and from heavy industry would be capped and companies would be awarded a quota of greenhouse gases they can emit each year, in the form of permits that can be traded with other companies.

The idea is that the companies that would find it most expensive to cut emissions can buy permits from those that find it cheap to cut their greenhouse gas output.

This would not be the first system of greenhouse gas trading in the US – several states have been operating cap-and-trade schemes since last year.

Nor would it be it the first federal cap-and-trade system, as other gases such as SOx and NOx, which are air pollutants, are also covered by a cap-and-trade system that has been in place since the early 1990s.

What it does do

As it stands – and the bill could still undergo many revisions – the bill would cut US greenhouse gases by 17 per cent compared with 2005 levels by the year 2020, and by 83 percent by 2050.

Electrical utilities would also face an obligation to generate 15 per cent of their electricity from renewables by 2020.

A floor price of $10 would prevent the price of carbon permits sinking too low to be of any use. And a ceiling price is also included, which in the first year would effectively be about $28 – if the price rose above that, more permits would be released to the market.

What it doesn’t do

The key concession has been that companies will now receive most of the permits they need for free, instead of having to buy them at auction.

This is the biggest criticism levelled at the bill by green groups. They say that awarding millions of free permits will be a windfall for utilities and will not result in emissions reductions.

A similar programme in the European Union resulted in windfall profits of about €9bn for electricity companies, which received all of their permits for free in the first stage of the EU’s emissions trading scheme, yet passed on to consumers through the electricity price the notional cost of having to buy the permits.

There are also a number of concessions for various interest groups, including farmers, and for the ethanol industry and the oil industry.

Related links:

Waxman Markey passes committee: But what’s to come? (FT Energy Source, 22/05/09)
US climate bill: how to make almost everyone unhappy (FT Energy Source, 19/05/09)
US carbon giveaways, and spending the proceeds (FT Energy Source, 23/04/09)