With the debate over climate change legislation stalled in the Senate, on Dec. 11, 2009, Sen. Maria Cantwell of Washington introduced her long-awaited alternative strategy for reducing carbon emissions dramatically by mid-century. In doing so, she and her Republican co-sponsor, Sen. Susan Collins of Maine, are challenging the widespread, but far from unanimous, consensus in support of the regulatory model known as cap and trade.

Overview

Cap and trade is the centerpiece of the House-passed Waxman-Markey climate bill, H.R. 2454, and the very similar Kerry-Boxer bill, S.1733, reported by the Senate Environment and Public Works Committee last month. Under both bills, an initial cap on emissions would be set, and then steadily lowered until it reaches 80 percent below 2005 emission levels by 2050. To achieve this, the Environmental Protection Agency (EPA) would regulate about 7,500 entities, such as manufacturing facilities and utilities, that use substantial amounts of fossil fuels.

Under both the Waxman-Markey and Kerry-Boxer bills, a portion of allowances to emit carbon would be issued without charge during a transition period in order to dampen the economic impact, and to support programs relating to renewables, energy efficiency and low-income assistance. But by 2035, all allowances would be auctioned. Any entity, including those with no obligation under the new law, would be allowed to purchase allowances at auction, thereby creating a market for the trading of allowances. Revenues from the auction would go to the Treasury Department, to be used to mitigate impacts on consumers and affected industries. Both bills are similar to the cap and trade system that has been functioning in Europe since 2005.

The Cantwell legislation includes a cap mechanism, and would arrive at virtually the same reductions by 2050, but diverges from the Waxman-Markey and Kerry-Boxer bills in almost every other important respect. Instead of regulating entities that use fossil fuels, the Cantwell bill would move “upstream,” regulating entities in the business of producing or importing fossil fuels. Consequently, the bill would regulate only about 3,000 entities nationally.

Under Cantwell’s bill, all allowances would be auctioned from the outset, the auctions would be open only to those with compliance obligations, and those regulated entities would not be able to purchase allowances significantly in excess of their emissions. Trading would be limited to regulated entities operating through a dedicated exchange platform administered by the Treasury. Auction revenue would be deposited in the Treasury, but three-quarters of it would then be returned to taxpayers on a per-capita basis in the form of monthly, tax-free “dividend” checks. The remaining quarter would be available for appropriation by Congress to fund programs designed to speed the nation’s transition to a low-carbon economy.

Cantwell’s rationale

In extensive written materials released along with her bill, Sen. Cantwell explains her rationale with respect to each of her innovations. Key points include:

1. Point of regulation. Cantwell’s bill chooses an “upstream” point of regulation, at the producer/importer level, before the fossil fuels reach those “downstream” entities that use them. Her reasoning is that there are fewer entities to regulate upstream, and that there will be fewer opportunities to “game the system” if the cost of allowances is imposed before fossil fuels are distributed among the many different energy-intensive industries.

2. Distribution of allowances. Unlike the Waxman-Markey and Kerry-Boxer bills, the Cantwell bill does not have a transition period during which allowances are distributed to entities for free. Rather, all allowances (“shares” in the Cantwell bill’s terminology) are auctioned from the outset.

3. Trading/market manipulation. In an attempt to control potential market manipulation, the Cantwell bill limits participation in auctions of shares to producers/importers of fossil fuels (defined in the bill as “first sellers”). Shares are tradable only among first sellers and only via a government-hosted exchange with publicly listed prices. Position limits will be imposed to prevent hoarding.

4. Dividends to taxpayers. The Cantwell bill requires that 75 percent of auction revenue be returned to consumers via a nontaxable monthly cash dividend paid on an equal per-capita basis to all legal residents of the United States. According to Cantwell, 80 percent of consumers will incur no net costs, and the lowest income levels will receive net positive benefits; the remaining 20 percent—those with the highest income—will see their net income reduced by less than 0.3 percent.

5. Safety valve. Unlike the Waxman-Markey and Kerry-Boxer bills, Cantwell’s bill provides that the price of allowances at auction will be limited by both a floor and a ceiling (commonly known as a “price collar”). At the outset, the price must be between $7 and $21, with an adjustment mechanism that would raise the band to about $16 to $40 by 2025, and to roughly $75 to $160 by 2050. According to Cantwell, the predictability of this pricing mechanism will make it easier for businesses to plan for and finance the necessary investments.

6. Offsets. The Waxman-Markey and Kerry-Boxer bills would allow emitting entities to offset a portion of their obligation by paying for emission reductions achieved through other means, such as changes in forestry practices. Cantwell’s bill does not allow offsets because, in her view, they remove some of the incentive for American companies to make the transition to a low-carbon way of doing business. She has in the past also expressed skepticism regarding the effectiveness of offset programs.

7. CERT Fund. The 25 percent of auction revenues not returned to consumers is directed to a new Clean Energy Reinvestment Trust (CERT) Fund. Among other things, revenues from the CERT Fund could be used to: (a) provide transition assistance to affected industries and workers experiencing economic dislocation due to climate change efforts; (b) provide mitigation and adaptation assistance to communities experiencing negative impacts from climate change; (c) support training programs to prepare workers for careers in energy efficiency, renewable energy and clean technology; and (d) support low-income energy efficiency loan programs.

Prospects

The prospects for the Cantwell bill are uncertain at this point. Until recently, the traditional cap and trade model seemed to be enjoying considerable momentum in Congress. However, that momentum has stalled in the Senate, where 60 votes are necessary to pass legislation over the objection of a determined minority. Currently, it appears that the cap and trade approach falls far short of that margin, with 10 to 20 moderate-to-conservative Democrats joining virtually all Republicans in expressing either deep reservations or outright opposition.

As an alternative to cap and trade, Sen. Cantwell’s bill is likely to merit a hard look from opponents of the Waxman-Markey and Kerry-Boxer bills. The cosponsorship of a Republican, albeit a moderate one, is helpful to Cantwell’s cause. If she can pick up support in the coming months from Senators who are now opposed to or skeptical of cap and trade, it is likely that at least some features of the Cantwell bill will find their way into the final legislation.