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The Climate Change Showdown: Dealmaking Begins Anew with Bill in U.S. Senate

If you thought automakers and banks were the only companies getting a blank check from the government -- think again.
As part of sweeping climate change legislation under consideration in Congress, energy companies and utilities will receive hundreds of billions of dollars from the government to help them comply with a new program to regulate greenhouse gases.  Which companies will cash in and how much money will get back to consumers hit with higher energy prices are shaping a summer showdown in Congress.

Yesterday morning, the Senate Environment and Public Works Committee held the first in a series of July hearings to develop legislative policies to address climate change.  While it was largely a cheerleading session by four top Obama Administration officials on the need for Congress to act quickly, the hearing kicks off a complicated set of negotiations to secure the 60 votes needed in the Senate to avoid a filibuster that would slow and even halt action on climate change this year.

It was a difficult path for the House of Representatives, where it took significant compromising -- and several hundred pages in last minute amendments -- to secure passage of the Waxman-Markey American Clean Energy and Security Act by a vote of 219-212 on June 26.

As the Senate develops its own version of the bill, at its core will be a cap-and-trade program that will ratchet down U.S. greenhouse gas emissions, setting a cap that decreases over time and requires emitters to hold to permits to offset their emissions beyond the set level.   

President Obama promised during his campaign last year to auction 100 percent of cap-and-trade "allowances" -- permits for every ton of greenhouse gases released into the atmosphere. The sale of these allowances to polluters was slated to fund the largest investment in renewable energy in history. The president has backed away from that commitment, and these allowances have become a new currency with which members of Congress barter for support.

Allowance allocation -- a topic previously limited to specialist policy wonks -- was the magic ingredient that brought weeks of intense negotiations and marathon sessions to resolution and led to the House of Representatives passing the landmark legislation in June.

The cost of passage in the House: 85 percent of allowances would be given out for free.  These allowances are targeted at utilities, low-income Americans and manufacturers ostensibly to prevent massive increases in consumer prices, but the allocations also satisfy uncommitted politicians who represent industrial, agricultural or coal-producing districts.

Whatever the rationale for free allowances, it is undisputed that allowances will be worth a lot of money and how they are distributed matters -- for companies, for the government, and for the public. Between now and 2050, the bill will redistribute trillions of dollars and generate hundreds of billions in government revenue.

As the Senate revises the allowance allocations in developing its cap-and-trade proposal, who will be on the sidelines, cheering or coaxing their fence-sitting Senators to secure a better deal?

First, it will be agriculture interests. An eleventh-hour deal brokered by House Agriculture Committee Chairman Colin Peterson was a coup for farm-state members, changing the way in which the EPA calculates biofuel emissions and shifting carbon offset management from the EPA to the USDA. Farm-state Senators will work for a similar deal.

Second, regulated utilities, largely seen as winners during the House Energy and Commerce Committee markup in May, will seek to protect the generous 35 percent of the free allowances they received in the House bill. These utilities, backed by coal-state politicians, will press for more allowances or at least defend their allocation.

Third, heavy industry -- like the carbon-intensive production of cement, pulp and paper, and steel -- will fight for more support. Senators from industrial centers in the South and Midwest will want additional allocations to prevent cost increases from making American-made products uncompetitive with international goods and to protect U.S. jobs from moving abroad.  

Fourth, the oil and gas industry, which has been increasingly pushed to the fringe of U.S. energy policy, will look to salvage their meager allowance allocation. At less than 2 percent, the industry is widely viewed as the big loser in the climate debate as refiners are asked to take the burden of the U.S. fossil-fuel transportation industry. Democrats and Republicans from Alaska and the Gulf of Mexico may look to deal their vote for more generous support.

How allowances are distributed will impact which companies win and lose in the regulated environment and determine how much revenue the U.S. government will have available to invest in complementary energy efficiency policies and clean technology development and deployment. Which is why allowance allocation is shaping up as the fight to watch this summer.

Bill Beaver is a summer associate at GreenOrder, an LRN company. The strategy and management consulting firm has helped leading companies turn sustainability into business value since 2000. GreenOrder associate Rebecca Lutzy contributed to this article.

Images CC licensed by Flickr users cliff1066 and FaceMePLS.

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