The food fight is just getting started.
Senators cobbling together a sweeping energy and climate bill are at the early stages of divvying up valuable emission allocations among regulated firms and well-financed interest groups.
Their decisions are big ones, worth hundreds of billions of dollars over the climate program's roughly 40-year lifespan. Already, lawmakers are fighting over who should get a bigger share of the allowances, as well as the broader philosophical mechanics of pricing greenhouse gases.
Interests pressing for Senate allocations run the gamut. Investor-owned power companies say they need more than a third of the free allocations for their customers to help them compensate for higher energy bills. States that stepped up first on climate policy claim their early actions deserve recognition. Other voices in the debate include retirees, wildlife conservationists, religious groups and advocates for keeping tropical rain forests standing.
Sens. Joe Lieberman (I-Conn.) and Lindsey Graham (R-S.C.) said yesterday they were getting closer to unveiling their "breakthrough" proposal on allocations with Sen. John Kerry (D-Mass.), promising a bill that would be both business and consumer-friendly. Graham and Lieberman said about 60 percent of the revenue raised by the government would immediately go directly back to the public as soon as the climate program starts.
Sources briefed on the senators' proposal say it has been dubbed "reduction and refund" instead of the "cap and trade" term that has been demonized by opponents.
The senators said that each industrial sector -- electric utilities, petroleum refiners, manufacturers -- will face different emission limits and startup dates. As such, the allocation plan for each also will be different.
For transportation fuels, the senators said an idea being offered up by BP America, ConocoPhillips and Shell Oil Co. involves a "linked fee" that would be tied to the carbon market price for the other industrial sectors.
"The money we generate comes from the companies. It's an assessment on what they do in the carbon world," Graham said. "They're creating a carbon product, they're going to pay a fee. Some of it will be passed on. Some of it will be absorbed. But the money we collect from them gets passed back to the consumer, which holds them harmless. Bill Gates may not get it, but most people in my state will. And any money not going back to the consumer from this linked fee has to go to do something the country needs, like retire the debt, or I won't support it."
Industry officials earlier this month suggested funneling some of the linked fee revenue into the Highway Trust Fund, à la federal gasoline taxes. But Graham said yesterday that the idea had lost traction. "That may be more problematic, but the one thing I can tell people about the money, if you don't get it, it's going to help your kids."
The senators also said they are planning to direct the electric utilities' allocations back to the public and industrial customers via local distribution companies, or LDCs.
Graham said the approach has an added layer of complexity because it is tied to the four additional years before major manufacturers must begin compliance when compared with the electric utilities.
"Say we've got a cement plant. We're going to make sure all the money collected in the utility area, the allocations are given so it goes right back to the customer, so that the homeowner doesn't see a spike in their energy bill, nor does the cement company. That's a breakthrough," Graham said. "We want to make sure that their indirect costs associated with the utilities, that they're held harmless and they're taken out of the system for a period of years because we don't have the technologies yet."
Making the task even more complicated for Kerry, Graham and Lieberman, budget rules in the Senate require a "haircut" of one quarter of the allocations to keep the bill deficit-neutral over its lifetime (E&E Daily, Oct. 29, 2009). That means the overall pot is smaller than the House, where Democrats did not face the same restrictions as they went through a brutal allocation battle of their own en route to passing legislation (H.R. 2454) last June by a narrow 219-212 margin.
"The allocation issue is obviously going to be, and always has been, one of the most significantly complicated and at times divisive aspects of the debate," said Jason Grumet, executive director of the Bipartisan Policy Center.
To EEI or not to EEI?
Lacking a complete bill or draft, many of the regulated industries are reluctant to comment on the senators' proposal.
"Everything is under discussion," Tom Kuhn, president of the Edison Electric Institute, said yesterday as he left a closed-door meeting with the Senate trio.
For the House bill, sponsors used an allocation formula created by EEI where the industry's allowances would be split 50-50 between companies based on their historic emission levels and retail sales.
Kuhn said yesterday that he thinks final decisions on allocations won't be made until several other critical parts of the proposal are decided, including emission limits and cost containment. "We've said it's right at the very end because it's a question of how the other pieces play out," Kuhn said.
EEI's allocation approach has been under fire during the Senate debate from electric utilities in the Midwest and Great Plains, and at least 14 Democratic senators who represent that region. They insist that the formula should be changed to reflect allocations based solely on emissions.
"There will be a battle on it," Sen. Tom Harkin (D-Iowa), the lead proponent of changing the EEI formula, said Wednesday. "We're going to fight hard. I think equity will be on our side. After all, if you're trying to get at emissions, it'd seem to me the allocations would be based on emissions, not on how much you sell."
Harkin said he has talked with Kerry about the proposal and recognized he has a large Democratic bloc of votes in his corner.
"I think the equity argument is on our side," Harkin said. "But I also think the votes are on our side. If you take all the votes from Pennsylvania to Colorado and the Canadian border south, I think the votes are on our side too."
But EEI also has its supporters.
Sens. Dianne Feinstein (D-Calif.) and Tom Carper (D-Del.) are among those who want the Senate to mirror the same formula adopted in the House.
In a letter sent last week to Kerry, Feinstein said a change from the EEI-approved allocation system could force electric companies to drop their support for the legislation. It also would leave energy consumers in California to pay higher costs for electricity even though their utilities already made significant low-carbon investments.
"Abandoning the 50-50 agreement to shift more assistance to consumers in the Midwest and Great Plains would put the needs of one set of consumers ahead of the needs of others, which would undermine the overarching goal of mitigating consumer impact," Feinstein wrote.
Carper said EEI's compromise came in part because of past climate debates that broke down because of disagreements among power companies with different energy portfolios -- coal, oil, natural gas and nuclear.
"I repeatedly asked the industry to help us solve this conundrum," Carper said. "And they did. They've come up with their compromise and I think we should embrace it."
Yet another sore spot in the allocation debate revolves around the question of how many credits to give away and how many to auction off. In the House, Democrats went with a hybrid approach, with a number of detailed directives on where the credits should go over the bill's lifetime.
Sens. Maria Cantwell (D-Wash.) and Susan Collins (R-Maine) are pushing in another direction entirely. Their proposal, dubbed the "CLEAR Act" (S. 2877), would skip the widespread trading of carbon allowances and instead require energy producers to bid in monthly auctions for carbon shares. It also would direct 75 percent of the resulting auction revenue as a refund to help compensate the public for increased energy costs, with the remaining 25 percent going toward clean energy research and development.
Cantwell said a primary driver of the bill was to avoid creating a multitrillion-dollar trading platform susceptible to market manipulation and price volatility -- something she fears will cause a public backlash under the Kerry-Graham-Lieberman proposal. She also said she disagreed with the idea of Congress setting up a system for free allowances through midcentury.
"I think a transparent process in which Congress paid attention to this issue every year for the next several decades is a better way to go," Cantwell said. "I think whatever happens with allowances, it's tough, we'd all like to think we could make those decisions right now for the next 50 years. But every person I've asked, do you want that responsibility and do you think you can do it accurately? They'd say no. And so they know you really need a process every year."
But Graham said the Cantwell-Collins approach -- known as "cap and dividend" -- simply does not take into account some of the key political demands needed to pass a climate bill in the first place.
"If you're a Southeastern state or a Midwestern state, where you are coal heavy, their approach basically collects money from your constituents to send it to hydropower states and other states," Graham said. "It's sort of a redistribution of wealth. That's something my part of the world won't accept."