Thursday night, a committee in the House of Representatives passed an ambitious climate bill — a big step toward having a law that controls greenhouse gases. At the heart of the bill is a mechanism called cap-and-trade. It's a careful mix of government mandate and free-market economy. How successful it will be is a matter of some debate.
Cap-and-trade is one of those wonky terms that have permeated the world of Washington, D.C. Part of its mystique is that a lot of people don't know what it really means.
It's Like Musical Chairs
Joseph Romm at the Center for American Progress likens cap-and-trade to musical chairs.
"Chairs are carbon dioxide pollution, mostly from the combustion of fossil fuels — coal, oil and natural gas," he says.
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 enough permits, you can buy them from someone who has extras.
Say you're an electric utility. The government has given you a bunch of chairs to start with. You can use them, sell them or hang onto them and use them later.
But remember this: Each year, the federal government will be allowing fewer and fewer chairs in the room. Romm says that's how cap-and-trade reduces carbon dioxide pollution, in a predictable way.
"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," Romm says. "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."
'Dirty Energy' Costs Could Rise
Sounds reasonable for companies, but what about those of us who buy electricity? Today, half the electricity in the United States comes from cheap coal. But coal burning produces lots of carbon dioxide. That means coal-fired electricity will be getting more expensive, as those companies have to buy increasingly scarce permits.
"Yes, we are going to raise the price of dirty energy," Romm says. "But that doesn't mean your total energy bill has to go up." The Waxman-Markey bill, currently making its way through the House, promotes energy efficiency. Energy will cost more, he explains, but in theory consumers will be using less of it.
It's hard to say how much energy prices might rise. House Energy and Commerce Committee members tried to protect against huge hikes by adding certain provisions to the Waxman-Markey bill.
Michael Shellenberger at the Breakthrough Institute in Oakland, Calif., calls those provisions loopholes.
"Under a true cap-and-trade system, you would allow the true price of carbon to rise to whatever level the market sets it at," he says. "But policymakers are afraid of the public backlash from rising energy prices."
Critics Say Loopholes Could Increase Emissions
So with these loopholes, companies can 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. And that system, so far, hasn't reduced greenhouse gas emissions.
"Earlier this year, the German environment minister actually said yeah, that's the great thing about our program, we can continue to build coal-fired power plants while claiming to reduce our emissions," Shellenberger says.
His think tank figures that the loopholes in the Waxman-Markey bill are so big that instead of U.S. emissions dropping, they could actually rise by 9 percent between 2005 and 2030. That's a worst-case scenario, but Romm at the Center for American Progress agrees these provisions are potentially a problem.
"We will have bugs to iron out, but I do believe the system will work," he says.
That is, if it's able to pass both the full House and then the Senate. And at the moment that's a long shot.