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.