CLIMATE:

Reality sets in; Senate bill's allocation pie smaller than House's

At first glance, global warming legislation unveiled last week by Sen. Barbara Boxer (D-Calif.) appeared to mirror the House-passed climate bill when it came to the critical question of how to distribute valuable emission allowances.

But a closer look reveals that the two measures are actually quite different.

Boxer's press release offered numerous details for how she wanted to slice up nearly three-quarters of the cap-and-trade program's allowances among power plants, petroleum refiners, automakers and other powerful industry interests. The chairwoman of the Environment and Public Works Committee also dedicated 15 percent of the measure's auction revenue to low- and moderate-income Americans to help them deal with higher energy bills.

Turns out, while many of the numbers Boxer used are the same as what is in the House bill, she was actually cutting up those allocations from a smaller pie than her counterparts on the other end of the Capitol.

As innocuous as that may sound, Boxer's bill adds fire to an already-blistering battle among well-financed industry and stakeholder groups fighting for a share of allowances that are projected to be worth hundreds of billions of dollars. Her approach also could put the Senate on a collision course with the House should Democratic leaders and President Obama succeed in making it all the way to conference negotiations.

Part of Boxer's move is explained through a Senate requirement that any major bill cannot add $5 billion to the federal deficit in any of the five decades following enactment, a threshold that required her to make calculated decisions about how to use the overall climate program's allocations through midcentury.

This is often called the "CBO haircut," named for the Congressional Budget Office number crunchers tasked with keeping lawmakers from veering off course on fiscal matters. Boxer takes her CBO haircut by immediately shaving 10 percent of the allowances from the overall program and auctioning them off with the revenue stream sent directly into the government's coffers from 2012 to 2029.

Boxer's auction also rises from 2030-2039 so that 22 percent of the allowance revenue goes into the Treasury before topping off at 25 percent between 2040 and 2050.

"I would not have a bill that is not deficit-neutral, so we're not changing that," Boxer said earlier this week.

By contrast, House rules are far less stringent when it comes to budget neutrality, requiring lawmakers there only to worry about the deficit for the first decade of the bill's life. That is why the House climate bill (H.R. 2454) auctions off 13 percent of its allowances for deficit reduction in 2012 and 2013 but quickly drops it down to 1 percent from 2014 to 2015.

There are no auction allowances for the deficit after 2023, freeing the House bill's Democratic authors to distribute credits to a variety of other causes in the program's later years. The availability of those allocations helped Speaker Nancy Pelosi (D-Calif.) and her allies win over just enough votes to survive a nail-biter floor debate that ended with a narrow 219-212 victory.

"If anything, the House needed to do what the House needed to do to pass their bill," said one source closely tracking the Capitol Hill climate debate.

In the Senate, Boxer added to the overall complexity of the bill when she took another slice out of her allocation pie that further shrinks the size of the allowance pool by more than 5 percent.

Her Senate proposal includes several "supplemental" allowances that go toward what aides have called "member-requested priorities." Those include allocations for agriculture, forestry and renewables (1 percent), transportation (1 percent), industrial emissions (0.5 percent), state and local energy efficiency and renewables (0.5 percent), small local distribution companies (0.5 percent) and international adaptation (0.25 percent).

Heeding concerns of several lawmakers from states with large amounts of industry, Boxer devoted 2 percent of the allocations through 2020 for a "market stability reserve fund" that would be auctioned in the event that carbon prices jump beyond a predetermined level.

On top of all that, Boxer's allocations get even smaller between 2017-2030 because she sets an even tougher, 20 percent greenhouse gas emissions target for 2020 compared with the House's bill 17 percent limit.

Senate Republicans have already tried to score political points by pointing out the differences with the House legislation. During an EPW Committee hearing yesterday, Sen. Kit Bond (R-Mo.) held up a pie chart that showed the Boxer draft has 1.46 billion fewer allowances than the House measure at a cost of about $133 billion.

"It's a smaller pie," Bond said.

Boxer didn't flinch. "You're absolutely correct," she said. "There's less in there because of the deficit reduction trust fund."

"We are a little handcuffed by the CBO scoring methodology," added Sen. Sheldon Whitehouse (D-R.I.). "We're in a bit of a pickle."

CBO in June said the House measure would bring in federal revenue of about $845.6 billion during the first decade of its operation. By contrast, federal spending is expected to increase by $821.2 billion, meaning the Treasury can expect a $24.4 billion net gain (E&E Daily, June 8).

A CBO score on the Senate bill is not required until the bill approaches the floor, though it is also not uncommon for the office to release a preliminary analysis earlier than that.

Haircut, or close shave?

Boxer has not gone out of her way to pinpoint the differences between her bill and the House, and many in industry and the nonprofit world are only now coming to grips with the true meaning of the 923-page proposal that emerged near midnight last Friday.

For the electric utility industry, Boxer's bill offers the same 30 percent allocation that was in the House bill for free to state-regulated local distribution companies, or LDCs, which are then instructed to use any revenue from the allowances to protect consumers from electricity price increases.

With the CBO haircut and the other supplemental allocations shaved off the top, the power companies are actually getting 30 percent of 75 percent, versus 30 percent of 85 percent.

"It's a harsh haircut," said David Crane, the president and CEO of Princeton, N.J.-based NRG Energy Inc. "I don't want to call it a scalping. But it's harsh."

Crane and many other electric utility officials were lobbying the Senate to push the allocations up to 40 percent. Now, they will be fighting just to get back to the House's level.

"That kind of jumped out at people," said Ralph Izzo, the president and CEO of Newark, N.J.-based Public Service Enterprise Group. "It's a big deal for those folks who are worried about the percentage increase, and we'd like them to worry less about it. The way to do that is to give them the allowances."

Back-of-the-envelope industry estimates suggest that the electric utility LDCs could lose about $40 billion to $50 billion in allowances over the lifetime of the legislation if Boxer's approach were to become law over the House proposal, though several sources familiar with the process warned against giving too much credence to such price tags given the fluid nature of the negotiations, as well as the difficulties in predicting the true cost of a carbon credit.

Other groups do not like getting short changed in the allocations either.

Chad Stone, a chief economist at the Center on Budget and Policy Priorities, said he is upset that the Senate bill's 15 percent auction with revenue dedicated to low-and moderate income families does not equal the same 15 percent figure in the House bill.

After figuring in the CBO haircut and the "supplemental" allowances, Stone figures those groups get only about 12.6 percent of the allocations.

"No matter what, CBO haircut or no CBO haircut, the competition is fierce and the demands are greater than 100 percent of the allowances," he said.

The senior citizen advocacy group AARP, National Consumer Law Center, Public Citizen and Consumers Union also caught on to the differences between the House and Senate bills, raising it as part of a broader letter about the bill sent to Boxer this week.

Dean Sagar, director of government relations at AARP, said the Senate bill's formula would not have enough money to reach some of the poorest Americans. "It may not be as helpful as Congress thinks or has been told it would be," he said.

Several industry sources acknowledged the differences but opted against saying much publicly given that Boxer's bill is still expected to be melded with efforts from the Senate Finance Committee and among other moderate Democrats and Republicans in Majority Leader Harry Reid's (D-Nev.) office.

"This will all have to be dealt with, but this is by no means the final word," Stone said. "This is to get a vehicle going in the Senate."

Many wonder how this issue would be resolved if the Senate passes its bill and got into a conference with the House.

Several Capitol Hill aides said the House and Senate will apply their own rules when debating a conference report. But one of two would have to prevail in negotiations, and most people interviewed say that it would be that Senate given it has more onerous budget requirements.

Yet a Senate victory over the House on the size of the allocation pie could pose major challenges for Pelosi and Reps. Henry Waxman (D-Calif.) and Ed Markey (D-Mass.), the sponsors who carefully constructed their bill to get it through in the first place.

Izzo said that Senate authors may need to take other steps to help the electric industry. "Even if CBO rules the land and it becomes the 29th amendment or whatever we're up to, then perhaps you can do something with offsets and the price collar to make it a bit stronger and things of that nature."

The PSEG chief also said he could not fault the Senate authors for having to abide by budget policies. But he wasn't so sure about the 5.75 percent allocation that Boxer dedicated to member-specific projects.

"The other things are under their control," Izzo said.

Crane added that he did not want the ensuing allocation battle to start a food fight in the Senate or with the House. "That whole thing hurts," he said. "I hope they find a way to work with the CBO. We're not really trying to take it out of anyone else's skin. Everyone is struggling as it is."

Stone said the House may have some wiggle room should it end up in negotiations with the Senate given a suite of vaguely committed allocations to be used closer to the middle of the century that could be shifted back to deficit reduction.

"Somehow it will all get worked out," Stone said.

That's what puppies are for

CBO officials declined to comment about the differences between the House and Senate bills but cited several published documents that explain how they reached the conclusions that are forcing Congress to deal with the federal deficit.

Basically, CBO treats pollution allowances as if they are federal revenue, and allocating them to different entities counts as spending subject to an indirect tax, like an excise tax or custom duties. In a January memo, CBO said that it applies a standard 25 percent offset to calculate the revenue that the climate policy might generate.

For example, if emission permits generate $100 billion in revenue in a given year, CBO estimates that it would also reflect an offsetting reduction of $25 billion in income and payroll taxes, for a net revenue gain of $75 billion. So both the House and Senate must set aside 25 percent of the allowances to keep the bill deficit neutral.

CBO also forces a haircut on any of the allocation giveaways where there is a direct requirement for the receiving entity to do something with the income, which it considers displaced spending that would otherwise be in the private economy and subject to a tax. Examples include block grants for a state's energy efficiency projects, federal research development and deployment, low-income rebates to people without taxable income, public transit, job training and international deforestation.

Adding to the complexity, CBO allows for something known as "offsetting offsets," which means no haircut whenever the revenue is returned directly via tax cuts or credits to a taxable entity.

Few would dispute the CBO process is anything close to simple. In fact, the online environmental magazine Grist ran a column about the dispute that spliced in pictures of cute puppies to keep its readers interested.

The allocation dispute has the attention of Republicans, including lawmakers still on the fence and also those clearly opposed to the legislation. "People want to know what's going on," Bond said yesterday. "We're still trying to figure out how these complicated, cockamamie schemes are going to work. Anything that's that complicated is by definition highly suspect and the more I hear, the more I suspect."

Energy and Natural Resources Committee ranking member Lisa Murkowski (R-Alaska) has said she remains open to voting for a climate bill that caps U.S. emissions. But she has also expressed concerns about the competition for allocations, pointing out during a hearing last week that 20 different entities successfully lobbied the House for free allowances.

"An exercise akin to doling out pieces of a pie," Murkowski said of the House bill. "But as climate legislation is developed in the Senate, we're faced with a hard reality. There aren't enough pieces left to satisfy the groups vying for them to repeat this process a second time."

A former congressional staffer familiar with the budget process questioned the Senate rationale for relying on such long-term budget projections given the sheer number of uncertainties over so many years, from recessions to wars and inflation.

"When looking out that far, you're just cooking the numbers," the former aide said. "You say something to meet whatever test you have to meet, but it doesn't have any basis in reality."

Dallas Burtraw, a senior fellow at Resources for the Future, said that while some firms and consumers may be getting less allocations in the Senate bill, people should also keep in mind that those allowances still exist but are now serving taxpayers in another way.

"The difference," Burtraw said, "doesn't go into thin air."