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This is ALL THINGS CONSIDERED from NPR News. I'm Michele Norris.

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And I'm Melissa Block.

Congress has taken a big step toward passing a law to control greenhouse gases. Yesterday, a key committee in the House of Representatives approved an ambitious climate bill. At the heart of the bill is a mechanism that President Obama has championed, called cap-and-trade. It's a complicated mix of free market and government mandate.

NPR's Richard Harris explains how it works, and whether it would work in reducing global warming.

RICHARD HARRIS: Cap-and-trade is one of those wonky terms that has permeated the world of Washington, D.C. But part of its mystique is a lot of people don't know what it really means.

Mr. JOSEPH ROMM (Center for American Progress): I'll give an analogy, which is it's sort of like musical chairs.

HARRIS: That's Joseph Romm at the Center for American Progress. He likes cap-and-trade, and he uses the game to explain how it works.

Mr. ROMM: Chairs are carbon dioxide pollution, mostly from the combustion of fossil fuels — coal, oil and natural gas.

HARRIS: Only so many chairs are allowed in the room. The government sets the number. That's the cap in cap-and-trade. And to reduce emissions over time, the government gradually takes chairs away. Now, here's the trade part: A chair is a permit, which you need if you want to emit carbon dioxide. If you don't have one, well…

Mr. ROMM: Somebody could sell you their chair if they figured out a way to live without a chair.

HARRIS: Say you're an electric company; the government has given you a bunch of chairs to start with. Need more? Buy them. Have chairs left over? Sell them. But remember this: Each year, the federal government will be allowing fewer and fewer chairs in the room. Joe Romm says that's how it reduces carbon dioxide pollution in a predictable way.

Mr. ROMM: You know exactly how many chairs there are going to be every year, so no one's going to be surprised, and they can plan ahead. And the whole point of doing it this way is to allow utilities and other big polluters to have a certainty about what's going to happen so they can make the transition over time to a clean-energy economy.

HARRIS: Sounds reasonable for them but meanwhile, what's going to happen to us, the folks who use electricity? Well, today, half of our electricity comes from cheap coal. But coal burning produces lots and lots of carbon dioxide. And as permits or chairs get scarce, it will cost more and more to buy them.

Mr. ROMM: Yes, we are going to raise the price of dirty energy.

HARRIS: So your electricity rates are going to go up.

Mr. ROMM: But that doesn't mean that your total energy bill has to go up because this bill promotes energy efficiency. So you can use less energy and it may cost a little more.

HARRIS: How much will your energy rates go up? Hard to say. To protect us against nasty surprises, politicians have added some features to this cap-and-trade system that you might call loopholes. That's what Michael Shellenberger at the Breakthrough Institute in Oakland, California, calls them. He doesn't like this version of cap-and-trade.

Mr. MICHAEL SHELLENBERGER (Breakthrough Institute): Under a true cap-and-trade system, you would allow the price of carbon to rise to whatever level the market sets it at. But policymakers are afraid of the public backlash from rising energy prices.

HARRIS: So with these loopholes, companies can, for example, borrow chairs — or permits — from the future. Or they can pay someone to plant trees halfway around the world. That's what European companies have been doing with their cap-and-trade system.

Mr. SHELLENBERGER: Earlier this year, the German environment minister actually said yeah, that's the great thing about our program, is that we can continue to build coal-fired power plants while claiming to reduce our emissions.

HARRIS: Shellenberger's think tank figures that the loopholes in the Waxman-Markey bill are so big that instead of having our emissions drop, they could actually rise by 9 percent between 2005 and 2030. That may be unduly pessimistic, but Joseph Romm at the Center for American Progress agrees that these provisions are potentially a problem.

Mr. ROMM: Yeah, we will have some bugs to iron out, but I do believe that the system will work.

HARRIS: That is, if it's able to pass both houses of Congress. And at the moment, that's a long shot.

Richard Harris, NPR News, Washington.

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