Senate Committee Mulls Cap-and-Trade System
The Senate Environment and Public Works Committee is due Wednesday to review details of a cap-and-trade system that could help the United States cut greenhouse gas emissions. It creates a financial incentive for emission reductions by assigning a cost to polluting.
The way it works, the government would decide how many tons of greenhouse gases the United States can emit in a given year. Power plants, refineries and some factories would need permits for each ton they pollute. Over time, the total amount of emissions allowed would be cut, so there would be fewer permits. That's the cap.
As for the trade, take two companies that pollute and give each 100 permits. The first company may easily reduce its emissions and find itself with 50 extra permits. The second firm may not find easy ways to reduce emissions and need to increase production, but it will need more permits.
"The first firm would say I have 50 permits to sell and the second firm would say how much would you sell it to me for? And there would be markets in which those firms could undertake that kind of transaction just like there are financial markets today for selling stocks of a firm," said Peter Orszag, director of the Congressional Budget Office.
That's the basic concept. But there are variables for Congress to consider. Chief among them is whether to initially give away the permits to companies or to sell them.
Orszag says it's a big question because of the amount of money at stake. "Our estimate suggests that under many of the proposals under discussion the value of the permits would be between $50 billion and $300 billion a year by 2020."
One advantage of giving them away is political. It will please the companies and attract votes from senators who support coal and other fossil fuel industries.
The draft bill being considered in the Senate committee would start out giving away most of the permits. But by 2036 companies would have to buy the permits from the government through an auction.
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RENEE MONTAGNE, host:
An issue some senators are talking about today on Capitol Hill is air pollution. The Senate Environment Committee is considering how to cut greenhouse gas emissions. The legislation would set up something called a cap and trade system.
NPR's Elizabeth Shogren reports.
ELIZABETH SHOGREN: Under a cap and trade system, the government would decide how many tons of greenhouse gases the United States can emit in a given year. Power plants, refineries and some factories would need permits for each ton they pollute. Over time, the amount of emissions allowed would be cut, so there would be fewer permits to go around. That's the cap.
Peter Orszag, director of the Congressional Budget Office, explains how the trade part works. Imagine two companies that pollute. Each gets a hundred permits. The first company easily reduces its emissions so it finds itself with 50 extra permits. The other firm can't find ways to reduce emissions and it wants to increase production, so it needs more permits.
Mr. PETER ORSZAG (Congressional Budget Office): The first firm would say, hey, I have 50 permits to sell. And the second firm would say, I need 50 permits, how much would you sell them to me for? And there would be markets in which those firms could undertake that kind of transaction, just like there are financial markets today for selling stocks of a firm.
SHOGREN: That's the basic concept. But there are lots of variables that Congress has to consider. A major one is whether to initially give away the permits to companies or sell them. Orszag says it's a big question because there is a huge amount of money at stake.
Mr. ORSZAG: Our estimates suggest that under many of the proposals under discussion, the value of the permits would be between $50 and $300 billion a year by 2020.
SHOGREN: One advantage of giving them away is political. It will please the companies and attract votes from senators that support coal and other fossil fuel industries.
And Bruce Braine from American Electric Power says it will help some consumers.
Mr. BRUCE BRAINE (American Electric Power): If I'm going to have to buy those permits from the government, I'm going to have to turn around and charge the customers a lot more than I would if I just had those allowances allocated for free.
SHOGREN: But Orszag from the Congressional Budget Office says even if the permits are free, companies still will pass on the value of the permits to their customers in terms of higher costs for gasoline, electricity and products that take a lot of energy to produce.
Mr. ORSZAG: Economic analysis suggests that if you give the permits away, one of the consequences will be a significant increase in corporate profits as a result.
SHOGREN: Stanford University economics professor Lawrence Goulder says the European Union learned that the hard way in its cap and trade system. Companies profited by getting scarce and valuable permits without paying anything for them.
Professor LAWRENCE GOULDER (Stanford University): Over 95 percent of the allowances were allocated free and there was significant evidence of windfalls. I think that has changed the political debate a lot.
SHOGREN: In fact, now the European Union is considering auctioning off its pollution permits in the future. Some Democratic presidential candidates have come out in favor of auctioning all the permits. The draft bill being considered today in the Senate committee would start out giving away most of the permits. But by 2036, companies would have to buy the permits from the government through an auction.
Goulder says there are big benefits to the government if it sells the permits. The government would end up with a big pot of money.
Prof. GOULDER: And those revenues can be used for several beneficial purposes.
SHOGREN: The government could use some of the money to lessen the disproportionate pain that the new cap and trade system causes low-income Americans. They would be hit the hardest because they spend a larger portion of their income on energy than wealthier people. The government also could use some of the money to invest in cleaner sources of energy.
Elizabeth Shogren, NPR News, Washington. Transcript provided by NPR, Copyright National Public Radio.
