Climate change's Hail Mary

By Steve Hargreaves, staff writer


NEW YORK (CNNMoney.com) -- In the next couple of weeks, lawmakers are expected to unveil an unprecedented climate change proposal that may open up more areas for offshore drilling and cut emissions through a cap on greenhouse gases and a tax on gasoline.

Details on the proposal, put forth by Sens. John Kerry, D-Mass., Joe Lieberman, I-Conn., and Lindsey Graham, R-S.C., are scant - the actual bill isn't expected until at least the end of the month.

But since this may be the last time this year climate change law is discussed, timing is critical. And with health care, financial reform and looming elections on Washington's collective plate, it faces an uphill battle.

Still, there's an outside chance the novel idea could gain traction.

"If they put out something people really like, they've got a real shot," said Christine Tezak, an energy and environmental policy analyst at asset management firm Robert W. Baird & Co.

Cutting emissions

The oil, utility and manufacturing industries will all be affected by the new law -- the challenge is to craft something they'll all feel comfortable with.

Tax gasoline: Many oil companies have opposed a cap-and-trade system -- where the government issues annual permits to pollute and then ratchets down that number each year.

Like many economists, oil companies maintain that it is an inefficient system, with too many middle men to handle the complex trading of permits.

Their opposition to cap-and-trade intensified when they weren't granted liberal exemptions under the greenhouse gas bill that passed the House last summer -- the bill that this Senate version is meant to complement.

So to win their support the Senate proposal is thought to include a straight-up carbon tax on products derived from oil, such as gasoline, which would likely be passed along to consumers at the pump.

The tax isn't expected to be huge -- starting at something under 10 cents a gallon for gasoline and moving up to maybe 20 cents a gallon after 10 years, said Kevin Book, Managing Director of research at ClearView Energy Partners, a Washington D.C.-based research firm.

And the tax isn't expected to discourage people from driving, said Book, as it's too gradual and small to have much of an impact. But revenue from it would likely be spent on other, cleaner transportation projects like mass transit or subsidies for hybrid cars.

So although the oil industry may be more receptive to this gas tax idea, their ultimate support for the law is uncertain.

"We'd like to see more of the proposal," said Lou Hayden, senior director of federal relations at the American Petroleum Institute, echoing the sentiment of most interest groups involved.

In the end, at least one analyst doesn't think the oil industry will play ball.

"It is unlikely that the oil industry will eventually support whatever shape it takes in the bill," Divya Reddy, an energy policy analyst at the political consultancy Eurasia Group, wrote in a recent research note. "Moreover, carbon fees will translate into higher prices at the pump, an outcome with which few politicians will want to be associated."

Cap emissions for utilities: Power producers may give the proposal a warmer reception, although here again their eventual support lies in the details.

The utility industry as a whole was generally supportive of a cap-and-trade plan that applied to the whole economy, even if they dickered with lawmakers over how fast emission cuts should happen.

For utilities, a cap-and-trade law allows them to upgrade their equipment and pass the cost along to consumers. And under the House cap-and-trade bill, the pass-through to consumers is offset by plans that allow reductions to come from things like planting trees and rebates for low income ratepayers. The Congressional Budget Office said the House bill would cost the average household an additional $175 a year.

As for participating in a cap-and-trade plan without other manufacturers, the industry didn't rule it out.

"We're keeping an open mind on everything," said Jim Owen, spokesman for the utility association's Edison Electric Institute.

A temporary reprieve for manufacturers - Several Midwest Senators opposed a greenhouse gas bill on the grounds that it would make U.S. firms less competitive with foreign factories that don't have to comply with tighter pollution rules, and hence cost American jobs.

To get around this, the Senate plan calls for some delay in holding factories accountable to the new rules -- maybe five to 10 years.

It's unclear whether this will be enough to get industry and their key Midwest lawmakers on board.

More energy

In return for approving all the reductions, lawmakers that focus on energy production want some bones.

Drilling - Key among them is greater access to U.S. oil and gas reserves -- and the great prize in that is Alaska's Arctic National Wildlife Refuge (ANWR).

"You want to have me sit down at the table and talk about what a strong domestic production piece is, [then] you have to be willing to talk to me about ANWR," Sen. Lisa Murkowski, R-Alaska, was quoted as saying in remarks about what it would take to get her to support a climate bill.

Lieberman said that is not an option, and most analysts say opening ANWR isn't in the cards.

But expanding production in the eastern Gulf of Mexico is, as well as encouraging some states to open up their waters to oil and gas drilling, said Baird's Tezak. It's thought that Virginia, among other states, might jump at federal laws that permanently opened more offshore areas.

Nukes - More support for nuclear power may also be in order, although it's unclear how much more the Senate plan might allocate beyond President Obama's recent pledge of over $50 billion in loan guarantees for the industry.

Most analysts think this is probably the last chance the Senate has this year to pass a climate bill, one of Obama's key policy goals.

With everything going on in Washington, Obama isn't expected to give this his undivided attention.

"He is most likely to pay lip service to the bill but not put himself on the line for it the way he has done for health care," wrote Eurasia Group's Reddy.

But few expect this issue to go away. If a bill doesn't materialize this year, many expect this last ditch effort will form the starting point for negotiations in 2011. To top of page

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